What Can Apple's Antitrust Suit Teach Us About the Evolution of Digital Music?
Alicia Hansen/Bloomberg News

Is the record business better off that it was eight years ago? The question comes to mind while following an antitrust lawsuit against Apple in an Oakland court that is revisiting a time when the industry was trying to build digital businesses while suppressing piracy.

In terms of revenue, the record business is definitely worse off. But in terms of serving fans, the record business has made huge strides. Consumers today have far more access and enjoy better interoperability between software and hardware. And shouldn't happy consumers be the ultimate goal? 

The current court case may peter out soon enough. On Monday the case took a strange turn when the court learned the second of two plaintiffs did not purchase an iPod during the period Apple illegally restricted iPod owners' ability to play music acquired at other download stores. The judge may allow the trial to continue, however, and is giving the plaintiffs' attorney a day to find a new lead plaintiff.

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Apple is effectively taking the blame for the demands placed on it by the record business during the digital music industry's formative years. Early in the history of digital music sales, the major record labels insisted retailers' downloads contain DRM to limit piracy. In hindsight these fears may seem unreasonable or unwarranted, but at the time piracy was far greater and present a problem.

The post-Napster days (the early- to mid-2000s) were a sort of golden age of peer-to-peer services, with an abundance of companies competing to satisfy consumers' desire for music. This easy access to free music was troublesome. Some people foresaw a nefarious marriage of storage space and ubiquitous, free music that would demolish any hopes of monetizing digital music. (Back in 2004, a 1GB SanDisk SD card cost $499. Today, a 128GB SD card, which holds over 1,165 hours of 256kpbs MP3 files, goes for less than $100.) Soon, all the world's music could fit on a single device.

The lawsuit is ultimately an indictment of DRM. Apple's DRM, called FairPlay, meant iTunes purchases could be played only on iTunes software -- both Mac and Windows -- and only on the iPod. And until Amazon launched its MP3 store in 2008, the iPod could not play digital music from most other retailers (there were exceptions such as eMusic, which at the time only sold music from independent labels).

Whatever the outcome, the antitrust lawsuit against Apple is a nice opportunity to revisit the last decade's digital music business. It's hard not to appreciate the gains made since then.

First, the bad. Record business revenues were certainly better eight years ago. Recorded music sales had a retail value of $11.5 billion in 2006, according to the RIAA, 64 percent higher than $7 billion last year. One may pine for the days of growing digital download royalty checks and a bulkier physical business, but it's hard to argue today's market is not a vast improvement from that of 2006, a time when piracy was far more threatening, consumers were treated with distrust, and streaming services failed to gain traction with consumers.

But two things would end up changing digital music for the better: the iPhone, and a new era of streaming services.

The launch of the iPhone in early 2007 brought freedom and mobility to digital music. Apple -- and later Google's Android mobile platform -- allowed a smartphone owner to install apps from a number of competing digital music services. Streaming services took advantage. Pandora released its iPhone app in 2008. Spotify launched its mobile apps -- for iPhone and Android -- in 2009. An iPhone user still had to put in effort to buy MP3s outside of iTunes, but the iPhone still provided far more freedom than the iPod.

Because of apps, streaming services had access to consumers through their mobile devices. (Rhapsody and Napster, both precursors to Spotify, were shut out of the iPod. Rhapsody tried to gatecrash the iPod with a product called Harmony in 2004. Apple quickly updated the iPod software to prevent outside files.) People could stream a radio station, view YouTube or make playlists on a subscription service either at or away from home. And with the use of Bluetooth technology, mobile phones can be paired effortlessly to car stereos and wireless speakers.

Apple eventually ditched DRM in January 2009. Microsoft rebranded PlaysForSure in 2007, a year after it launched the unsuccessful Zune music player and service. But DRM didn't die out. It's alive and well -- and accepted without complaints by music consumers -- in the new music business.

DRM is fundamental to access-based services like Spotify. Subscribers that download tracks to mobile devices do so with restrictions. In the linga franca of subscription services, a download is actually a tethered download, one that is contingent and not owned in perpetuity. The basic precept of subscription services is access through payment. Once a person stops paying, access to the track is gone. (However, depending on the service, the track may still be accessed in a more limited nature on a free, ad-supported tier.)

Unlike the problems associated with DRM for CDs and downloads, consumers don't object to this type of DRM, because they are paying for access, not ownership.

The record business is increasingly characterized by this arrangement, which is clearly the future of entertainment. Where there once was a radio tower, or a Tower Records, now stands Pandora and Spotify. DVD and video downloads are being replaced by streaming services like Netflix. Many consumers -- especially the younger ones -- don't have the same predilection for amassing collections of recordings. Even though today's storage devices can hold huge libraries of downloads -- the fear of the 2000s -- the availability of broadband has led many consumers to legal streaming services, not curated lists of files.

Happy customers don't necessarily mean happy businesses, however. Shifting from a purchase-based business to an access-based one requires adjustments. Controversies have ensued. Some artists and labels are unhappy with the royalties received from streaming services. Publishers are continuously fighting for a greater share of service's revenue. Year after year, these services are put on the defensive by an industry caught in an uncertain transition.

But if customers are happy, if they have better legal options than illegal ones, and if they can be reached on a variety of devices at any time, isn't that ultimately good for business? Anybody with a computer or mobile phone is now a potential customer. Streaming may have its downsides, but it offers plenty of upside.

Between Napster's launch in 1999 and iTunes' debut in 2003, the music business had what seemed to be an insurmountable problem. A similar feeling exists today. The record business eventually built a download business. It can do the same with streaming.