All Things Digital

Sony BMG (SNE) has signed on to Nokia’s (NOK) new “Comes With Music” program and really, who better than the pioneer of the rootkit digital-rights management scheme to endorse Nokia’s DRM-hobbled prebundled music initiative?

This morning, Sony BMG became the second record label to jump on board the Finnish phone giant’s Comes With Music offering, which–when it launches in the second half of 2008, will package mobile phones with a year of unlimited access to music. There are, however, certain caveats to that value proposition, as I pointed out last December:

Though Comes With Music does indeed permit owners of certain Nokia cellphones to download as many songs as humanly possible in one year (with no per-song data charges), transfer them to a PC and keep them at the end of that time, they must pay a per-song usage fee to burn them to CD. What’s more, the songs are wrapped in Microsoft’s (MSFT) ironically named ‘Plays for Sure’ digital-rights management scheme, which prevents them from being played on the iPod, Zune, etc. Finally, another 12 months access to the music catalog requires the purchase of a brand new phone.”

Clearly, Sony, like Universal (VIV.PA) before it, doesn’t see these issues as off-putting to consumers. “When you give consumers the key to the candy store without any limitations, there’s a lot more opportunity for discovering music that you might not have found before,” said Thomas Hesse, president of global digital business and U.S. sales for Sony BMG Music Entertainment. “We think this will energize the discovery of music.”

It might energize Sony BMG’s bottom line a bit as well. When Universal first signed up for Comes with Music, sources close to the company said that Nokia would pay the label up to $35 for every phone that offers access to its library. Nokia subsequently denied it was paying that amount, but it’s definitely paying something–to Universal, Sony and whatever other labels it manages to line up for the service.

If the recording industry thinks Steve Jobs has been a bear to negotiate with in the past, wait until it gets a load of him now.

Apple’s (AAPL) iTunes Store has become the No. 2 music retailer in the states, according to a new study by the NPD Group. It’s second only to Wal-Mart and, if things keep going the way they are, Apple will soon surpass it. “Digital sales were up close to 50% and CD sales were down 20% last year,” said Russ Crupnick, the NPD Group’s president of music. “Even at half that growth rate in digital sales, Apple will in all likelihood catch Wal-Mart this year.”

One last point worth noting here: While 1 million consumers dropped out of the CD-buyer market in 2007, 29 million acquired digital music legally. That’s an increase of 5 million over the previous year. Growth here was largely driven by the 36-to-50 age group. “The continued growth in legal download sites is encouraging, yet the industry struggles to improve the value of each digital customer,” said Crupnick. “With so many baby boomers and Gen Xers entering the market, there are certainly opportunities to sell more digital albums, promote older catalog titles, or create bundles that will raise revenues. In the near term that’s going to be the best means available to narrow the gap on dwindling CD revenues.”

Market research has uncovered yet another rift between Mac and PC users. According to the NPD Group’s Digital Music Monitor, Mac users are far more likely than PC users to pay to download music.

They’re also more likely to buy CDs. Of all Mac users surveyed by NPD, 50% paid to download music during the third quarter of 2007 compared to just 16% of PC users. During the same period, more than 32% of Mac users purchased CDs, compared to just 28% of PC users. “There’s still a cultural divide between Apple consumers and the rest of the computing world, and that’s especially apparent when it comes to the way they interact with music,” said NPD Group analyst Russ Crupnick. “Mac users are not only more active in digital music, they are also more likely to buy CDs.”

Course, they’re also “more likely” to have Apple’s iTunes digital music store pre-installed on their machines. That might have something to do with the discrepancy here as well.

In any event, it would seem that, contrary to the claims of NBC Universal Chief Executive Jeff Zucker, Apple hasn’t “destroyed the music business.” “While the market for digital music is growing, it’s growing slower than many would like it to–CD sales are still declining and digital music has not entirely replaced those lost sales,” Crupnick added. “The more consumers become comfortable paying for digital music, the more chance they will evangelize to others. And at this point in the game, it’s the growing base of Apple consumers that are the industry’s low-hanging fruit when it comes to migrating from physical CDs to digital music.”

If terms of Nokia’s new “Comes with Music” program appear impossibly generous to the consumer, who will pay no monthly fees for Universal Music Group’s entire catalog, it’s because they are.

Though “Comes with Music” does indeed permit owners of certain Nokia cellphones to download as many songs as humanly possible in one year (with no per-song data charges), transfer them to a PC and keep them at the end of that time, they must pay a per-song usage fee to burn them to CD. What’s more, the songs are wrapped in Microsoft’s ironically named “Plays for Sure” digital rights management scheme, which prevents them from being played on the iPod, Zune, etc. Finally, another 12 months access to the UMG catalog requires the purchase of a brand new phone.

All of which makes perfect business sense–after all, Nokia’s not in the business of giving away music–though it certainly would like to be perceived that way from the looks of the company’s press release. “This is how the consumers will consume music going forward. This is a step toward where this business we believe will be moving to in two to three years time,” Rob Wells, Universal’s SVP of digital, told Reuters. “Consumers will have access to all the recorded music available through the price of the device, or the price of service, or the price of broadband.”

And they’ll pay an additional price to use it as they see fit.

Add the personal details of most every child in the U.K. to the growing tally of sensitive consumer information misplaced by those entrusted with it. Because two CDs containing child benefit information on every family in Britain with a child under 16 have gone missing.

HM Revenue and Customs Chancellor Alistair Darling broke the news to the public in a statement to the House of Commons, met with gasps of incredulity from those in attendence.

… Two password-protected discs containing a full copy of HMRC’s entire data in relation to the payment of child benefit was sent to the NAO, by HMRC’s post system operated by the courier TNT. The package was not recorded or registered. Mr. Speaker, it appears the data has failed to reach the addressee in the NAO.

“… The missing information contains details of all child benefit recipients: records for 25 million individuals and 7.25 million families. These records include the recipient and their children’s names, addresses and dates of birth; it includes child-benefit numbers, national insurance numbers and, where relevant, bank or building society account details.”

Astonishing, eh? Even more so given that the package containing the CDs–which was never registered or recorded–was mailed Oct. 18.

Huzzah!

Lawmakers and politicians met news of the breach with well-practiced outrage. Said Shadow Chancellor George Osborne: “Let us be clear about the scale of this catastrophic mistake–the names, the addresses and the dates of birth of every child in the country are sitting on two computer discs that are apparently lost in the post, and the bank account details and national insurance numbers of 10 million parents, guardians and carers have gone missing. Half the country will be very anxious about the safety of their family and the security, and the whole country will be wondering how on earth the government allowed this to happen.”

Doug’s a very special guy. He’s the last of the great music executives who came up through A&R. He’s old school. I like him a lot.”

–Apple CEO Steve Jobs on Universal Music Group CEO Doug Morris

The per-device royalties Universal Music Group receives for every Zune player sold were apparently substantial enough to buy CEO Doug Morris a bigger set of balls, because he’s out drumming up support for an industry-owned subscription service with which he hopes to loosen Apple’s grip on the digital music market.

The endeavor is called “Total Music,” and Morris has already approached Sony BMG Music Entertainment and Warner Music Group about participating. His proposition: a subscription-based music service for the hardware industry, one whose cost could be baked into the hardware that supports it. Under the Total Music model, hardware makers subsidize the cost of music, which consumers are then given for “free” when they buy a new digital media player. That’s more money up front for hardware makers, but it’s a wise investment because, as Morris reckons, they’ll make that money back and then some by selling many more devices.

Interesting business model. “If the object is to wrest control of the market from Steve Jobs,” said Gartner analyst Mike McGuire, “this is a credible way to try it.”

Sadly for Morris, it’s also one inevitably complicated by recent turmoil in the music industry. With Radiohead releasing its latest album as a pay-what-you-will digital download, Nine Inch Nails declaring itself a free agent, and Madonna about to dump Warner Music Group for a concert promoter, we’re clearly seeing a sea change in music discovery, distribution and consumption, one perhaps lost on an industry so hardened by years of CD price fixing. So while the music industry struggles so to wrest control of the digital music market from Apple, some of today’s biggest popular artists are crafting an entirely new business model.

Well, this is sure to set a cat among the pigeons who still believe they have a God-given right to control the retail distribution and pricing of music.

Recently freed of its contractual obligation to major label EMI Group, top-selling British rock band Radiohead is releasing its seventh studio album, “In Rainbows,” on Oct. 10 as a digital download (presumably in delicious 320kbps, DRM-free MP3 format)–and it is letting its fans decide how much, if anything, to pay for it. “It’s up to you,” a message on the preorder site for the album reads. Click through to the pricing screen and a subsequent message adds: “No really. It’s up to you.”

And it is. Fans are free to pay whatever they’d like–as little as one penny (US two cents), plus a 45 pence (US 92 cents) charge for using a credit or debit card. “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one,” said Radiohead singer Thom Yorke. “And, yes, it probably would give us some perverse pleasure to say ‘F— you’ to this decaying business model.”

Question is, given a clear, legal alternative to downloading music for free, will fans choose to support its creators? Just in case they don’t, “In Rainbows” will also be sold as a “discbox,” which will feature the new album on CD and double-vinyl, as well as a second disc with seven additional songs, photos, artwork and lyrics. The materials will be packaged in a custom hardback book and slipcase and sold at a price wisely left up to the band: £40 (US $81.18).

And with that, Radiohead sidesteps the traditional music industry altogether. “This feels like yet another death knell,” an A&R executive at a major European label told Time magazine. “If the best band in the world doesn’t want a part of us, I’m not sure what’s left for this business.”

Apple’s not going to turn iTunes into the Microsoft Windows of the digital music space if Amazon can help it. This morning the retailer announced the public beta of its much-anticipated music download service, breathlessly touting it as “the world’s biggest selection of a la carte DRM-free MP3 music downloads.”

Amazon MP3, as the company’s cleverly named it, offers more than two million songs from 180,000 artists and over 20,000 major and independent labels, all of them in DRM-free MP3 format. Songs are digitized at 256 kilobits per second and cost between 89 cents and 99 cents per track–a bit less than their iTunes Plus doppelgangers, which Apple has been peddling for $1.29 each. That said, songs purchased from Amazon MP3, unlike those purchased from iTunes, can only be downloaded once. If they’re subsequently deleted or lost because of a system or disk error, Amazon won’t replace them free of charge. You’ve got to buy them all over again.

Just like a CD …

Anyway … With Sony and Virgin Digital both shuttering their online music offerings and Yahoo Music reportedly considering the shutdown of one or more of its subscription-based services, Amazon MP3 seems to be launching at a particularly opportune time. And given Amazon’s retail market power, it will likely do well.

But well enough to pose a credible threat to iTunes? Consensus among industry observers seems to be no. Says hypebot:

The Amazon MP3 Download Store IS NOT:

• The iTunes killer.
• Serious competition yes. Killer no. Too many people are used to the iTunes-to-iPod experience no matter how easy Amazon makes it.”