Why Harmony Causes Discord At Apple


Real's iPod compatibility would make it harder for Apple to profit from music publishing.

I can only think of two reasons why Apple would attempt to block the use of RealNetworks' Harmony system with the iPod.

The first explanation is that it's a kindergarten reaction: "It's mine, and you can't play with it!" While businesses sometime appear to act irrationally or petulantly, this isn't very convincing.

The other is that Apple plans to become a music publisher.

Currently, about half of the iTMS revenue goes directly to the labels. Most of the rest is swallowed in operating costs, with Apple showing a small profit as the economies of scale kick in. If emerging bands signed directly with Apple, the company's cut from sales would be much greater. Yes, there are risks, but I doubt it would be difficult to hire individuals who know how to manage them.

I can't see any benefit in signing established acts, as much of their value is in the back catalogue and Apple is very unlikely to get exclusive access to that.

In the short term, Harmony does present a minor threat to Apple in that any diversion of sales from iTMS to RNMS (or whatever it's called) could push iTMS back into the red. On the other hand, access to a wider range of legal content could only increase the iPod's popularity, and that's where Apple really makes the money.

Why would iPod owners buy their music elsewhere? Either because they can get the same tracks cheaper from other online outlets, because they can pay the same price and get the benefit of less restrictive DRM, or because they can get content from RNMS et al that isn't available at iTMS.

Turn that last point around. If Apple became a publisher (presumably via a subsidiary company called iTunes or something to avoid yet another round of litigation with Apple Corp), its supply of exclusive content would increase.

Such a plan would take a while to put into effect. Meanwhile, Apple needs to keep all those iPod owners' eyes on iTMS, as that will be the publicity conduit as well as the delivery channel for Apple-published content.

Apple's recent announcement that future Motorola phones will be iTunes-compatible only supports this theory. Unless you want to assume that Apple will receive a substantial royalty on each phone sold, the business justification has to come from anticipated music sales. Under the present iTMS model, Apple only makes a miniscule profit on each track sold, so there must be a plan to significantly increase profitability. Unless there are huge economies of scale about to be made, the only way I can see to do that its to cut out the record companies.

So that's why I think Apple is worried about Harmony. It's nothing to do with the circumvention of copy-protection mechanisms or reverse engineering. It's all about eyeballs.

Posted: Fri - July 30, 2004 at 09:33 AM        

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