14 December 2005

Bad Journalism #1 - BusinessWeek

I came across this BusinessWeek article late last week.

Now, I've had a few instances of this lately which are really getting me quite angry. With a scientific background, I am trained to think about proof. Proof can come about only through thinking about all possible scenarios. The worst science happens when a scientist has a single minded viewpoint and designs the experiments to prove that single viewpoint, when in fact the experiments should all be about disproving that.

Now, rightly or wrongly I expect similar standards in journalism - at least in what I consider to be the "quality" papers. I recently had a run-in with the Guardian when their long-time anti-Apple columnist Jack Schofield concluded that it was Apple's fault that Microsoft's XBox360 - while interfacing with the iPod - could not play music in the iTunes Music Store format. His evidence? A comment by a Microsoft person saying that they wanted to work with Apple but couldn't. The comment was not an original comment - it had been picked up from another article. Because Jack had failed to get a comment from Apple, he assumed that to be the truth. When queried he became quite defensive about this all being due to Apple's closed ecosystem, that they were unreasonably demanding 10% of all revenues for iPod accessories, and that they were monopolistic (and good ole' Microsoft was not). I pointed out that Bose, Alpine and others did not pay 10% to Apple for their product sales - just some percentage for adapters. Since then, I've noticed Pioneer and Denon hifi equipment with direct support for the iPod - including iTMS format material. My point to Jack was that he did not know enough information to blame one side in a business transaction, and that he was peddling one party's propaganda in this. What he could have said is that "it is a serious shame for the consumer that Apple and Microsoft could not agree how copy-protected music could be played via the XBox". I don't think I got anywhere. (Ironically, the Guardian runs an excellent "Bad Science" column - a pity they don't apply it to technology stories too).

And so to this article in BusinessWeek. The premise? That Apple itself is what is holding back the online music business. Full of quotes from Apple competitors and the music industry yet devoid of quotes from Apple itself. The article has an hypothesis - something that might get people's attention because it's controversial. But really the article has more holes than Swiss cheese.

Lets look at one bit of logic. Online music sales in the US appear to have plateaued. As the iTMS has the primary market share for this area, then clearly it is Apple that must be doing something wrong. Sounds plausible, doesn't it? Except it can't be. Apple does NOT have 100% market share. There are others in the market including Real, Napster and Yahoo. Some of these are quite recent entrants with aggressive tactics. So, if Apple is doing something wrong, surely these guys would be picking up the slack? Even if you take the iPod owning population out of it, there's still 25-30% non-iPod that would be buying more if it was just an Apple problem, surely? It could be true if the Apple store is actually LOSING market share so that while the overall market is flat, Apple's competitors are gaining. This possibility is ignored, so draw your own conclusions.

So, what reasons are put forth for the plateauing? Ah, it's the fixed price argument again. The article mentions that the labels have pressured Apple for variable pricing - essentially cheaper for older stuff and more expensive for newer stuff. To back that up, the article quotes a user as saying that he would buy more older music at a lower price. Duh! If the labels were arguing for a lower average selling price per unit, then this all makes sense. But it is quite obvious that they are not. Sure they want variable pricing. BUT, they want that with the AVERAGE price UP. Why am I so sure? Because it is Apple that has fought for the low fixed price (99cents). And it is Apple that has fought to maintain that. That's one reason. But let's looks at some others. If it was about variable pricing, the labels are free to explore this with other music stores are they not? And what has happened? Nothing. 99cents is basically as cheap as it gets. So, either the other stores agree with Apple, or can't afford to discount. Factor in the widely-held theory that Apple does NOT make money from the sale of music, it merely covers it's costs. So, why would Apple object to a reduction in pricing for online music? The point is they wouldn't - if there was an overall reduction. And that is how you conclude that what the labels mean by variable pricing is NOT what the consumer wants to see with variable pricing.

And it's worse than that. What Apple understands is that simplicity counts. Today's model is simple and easily understood. For consumers to grasp variable pricing will require a considerable cut in the average selling price or some other attractive offers. BusinessWeek attempts to head off some of these arguments by suggesting that Apple is sold out of iPod's so doesn't need to sell more music online. It even suggests that the labels will look beyond Cupertino if this doesn't correct itself soon! Really! Give me a break. Apple set out to make relatively little from the iTMS. But to artificially limit what it sells makes no business sense. They want people to buy as much as they can from this store for obvious (and selfish) reasons. And the labels should in fact be wishing for more partners like Apple who are prepared to forego profitting from online sales (of course, they're not happy with that - they now want a cut of the hardware sales as well!).

I sometimes wonder if I am representative of the general population. And on the point of music purchases I am to a degree and am not in other ways. I have a stack of vinyl I've never replaced. At a certain price point I would replace most of that via online. At a higher price point I'd replace SOME of it. And, as it is today, I've replaced none of it. (Given that I am an audiophile is the issue that makes me less representative) There are other artists I'd like to experiment with, but on an album pricing basis, I just won't do that. This year, I've tried a few things, mainly because I can now get new release CD's for as little as £6.99 via CDWow, and indeed very rarely need to pay more than £7.99 (that's about £1-2 less than a year ago via Amazon, and about £4-8 lower than a few years ago via shop). I prefer to get the physical item. It is a no-brainer that manufacturing/distribution costs for online are drastically lower than physical, so why am I still being asked £7.99 (and indeed more these days) for stuff online? Is that Apple's doing? I don't believe it is. I cannot see any reason for Apple to keep prices high. But the labels have a long history of hoping they can get a higher price. At this time, Madonna's album is £7.99 on iTMS and is number one. The Robbie Williams album is £9.48 and is not in the top ten. I can get Madonna's CD for £6.99 and Robbie's for £8.75 delivered from CDWow. The only question I've got is who is buying Madonna's album at £7.99 then!

So, why exactly am I going to buy a copy-protected, lower quality recording, that can't be resold if I don't like it from the Apple iTMS for MORE money than a physical CD? If that "more" was going to Apple, then I'd blame Apple. But we know that "more" is NOT going to Apple - quite the opposite. The record companies are making MUCH higher margins on the online sales at these price points. What is undermining their business models (among other things) is the global economy. They cannot exercise their geographic powers the way they used to when global logistics can correct the imbalances. Likewise, they have no long term geographic control over online. The geographic monopolies will crumble. The issue isn't VARIABLE pricing, it is about LOWER pricing. Especially lower pricing for older stuff that online delivers EXTREMELY economically. And lower pricing for new stuff too - at least at an album level. What happens when prices come down? Sales go up. And when cost of sales is very low (as it is in music) then profits rise that much faster. How many businesses has this been shown to be true in? Yet the labels consistently think these business rules do not apply to them.

I recently came across the usual intelligent comments at Ars Technica on Spitzer vs Sony. Towards the end is this gem of an insight...
....but it sure makes customers mad, and mad is good. One of the things that music execs want to accomplish in the short term with their DRM strategy is to put pressure on Apple to open up the iPod and its Fairplay DRM. The thinking (if you can call it that) apparently goes like this: angry customers can't rip a CD to their iPod and fire off a nasty note to Apple about how unhappy they are. Apple then caves, licensing Fairply or agreeing to support Windows Media. As one label executive told Variety, the hope is that when the great unwashed masses find themselves thwarted by DRM,
"Maybe they'll send Steve Jobs an e-mail."
Sony wants to turn its customers into a pressure group that will generate enough smoke and heat to crack Apple's stranglehold on the iPod, and DRM is one of the tools they're using to get the job done. It sounds strange, but does Sony want their customers angry?


What BusinessWeek has done by failing to peel off a layer of the onion and really investigate what is going on, is to become a mouthpiece for the labels' propaganda machine (and Apple's competitors to boot). The labels have a hero in Apple, but a hero they are worried has already turned into a monster. Once again, they are retreating from the real world into their imaginary world in which (they dream) the customer will pay more for their product, will re-pay every few years or so when the format changes again, and will be happy to limit their uses to those the labels deem acceptable (heh, I bet many of them think you and me should be buying BOTH a physical copy AND a digital copy!). I will be covering in a future article what things they COULD be doing to make the most of digital. Instead, they are using everything in their powers to mimic their past, slow the change, and paint the proponents of change as the bad guys. Headlines may sell papers, but over time consumers expect more from what they read. It is very simple to see. The online market does not belong to Apple (though it may be dominant), and the overall music market certainly does not. The labels know this, and an investigative business-oriented newspaper should too. The labels will have to deliver far more to the online buyer. That can come in partnership with Apple (and others), but must be driven by the labels. BusinessWeek should know and write better.

2 comments:

Charles said...

Ian, you're misrepresenting your "run-in" with Jack Schofield; I think you should link to the blog article and its comments. Ask yourself - who's in charge of the DRM of iTunes songs - Apple, or Microsoft? And who's building the Xbox - Apple, or Microsoft? Is the answer the same? If not, then the one that controls the DRM decides whether it's available.

I'd like a pointer to these hi-fis which can play iTMS songs without the data coming out of the headphone or audio-out jack. AFAIK Apple has not opened up the "Fairplay" DRM to anyone. Look at Airport Express - it's the only wireless router that can stream iTunes songs. The Streamium can't, other streaming wireless systems can't. Whose fault? Theirs?

Similarly, BW's article comes from talking to the record labels, because - I surmise - they're the ones who are talking. Companies that don't talk to journalists don't get their point of view expressed; it's as simple as that. BW doesn't have a biased point of view. It just reflects the conversations it can get involved in.

Ian Hobson said...

Nice to see you jump in and defend your co-workers!

I should have linked to the blog article - you're right, though I was unable to find the comment discussion when I looked recently - which was where the discussion took place. It might be me but I have now searched the site again, and can't find it. Happy to add the link if you let me have it.

Point-by-point. "The one that controls the DRM decides whether it's available". I'm afraid I think that's simplistic. To distribute music online, Apple and others have had to sign agreements with the major labels/industry groups. I'm sure the terms of those agreements, while confidential, are also very detailed in what can and cannot be done. We know in Apple's case that purchased music can play on up to 5 authorised computers, and unlimited iPods. It can also be burned to CD, with relatively few limitations. We know of other DRM's limits too. You yourself have highlighted HMV store's rather poor DRM. As we don't know the terms of the Apple agreement, we don't know whether an XBox could count as a computer or not. If it could, then there would need to be some agreeement between MS and Apple on how authorisation was done and maintained. If the XBox is not to count as a "computer" in this case, it could work as a playing extension of the iPod. Any iPod can play through an audio device either via line out (most models) or headphone socket. It can play ALL songs this way, though with newer iPods it cannot be controlled except via the dock connector. We also know that Apple has a program in place for using the dock connector. My point to Jack, and to you, is that we do not know the details of the agreements between a) Apple and the labels on what is allowed under the Fairplay DRM and b) Apple and Microsoft for connections between XBox and iPod. Neither do we know the details of discussions between Apple and MS. And unless we know these we CANNOT solely lay the blame on the person who "controls" the DRM. What we can say, as I have suggested in language which is consumer-friendly and makes them aware of the limitations that DRM (as applied by Apple or anyone else for that matter) can put on their freedoms is along the lines of "what a shame Apple and MS could not find a way to make iTMS music play through the XBox" and "this limitation is a good demonstration of how our freedoms can be curtailed by different DRM schemes maintained by companies who are responsible first and foremost to their shareholders". Both those comments are fairly indisputable and somewhat damning. Anything else is jumping to conclusions and, imho, shows a naivety about business issues. (I know you understand that because I know you've seen first hand how things like simple NDA's between one person and a company are so frustrating. What would you guess the size of the agreement Apple has with the labels? How much did it cost to put together? Then redone for each country in which iTMS operates?). Of course, technically speaking Xbox-iPod would have been a piece of cake. But business-wise and legal-wise far from it. You can't pick sides if you don't know the details.

Point number 2 - hifi's playing iTMS songs. Where do you want me to start? Pioneer has these two models, easily found VSX-74TXVi and VSX-72TXV. Both high end receivers. They connect to the iPod directly via a dock connector I believe. You can google lots of info on these, and it is explained on the Pioneer website. In addition, Onkyo and Harmon Kardon are 2 other examples I could find that both allow easy connection of iPod to their hifi receivers. Bose products also allow it, and numerous lower-end all-in-one or speaker products of course. For car connecting, there are even more choices from Pioneer, Alpine, Kenwood, Blaupunkt etc to say nothing of direct manufacturer support, and the Dension line of car adapters. All work via the dock connector, and provide both control of the iPod and playback of iTMS material. How's that for starters?

Then you mention Airport Express being the only wireless device that can stream iTunes songs. That is not true. iTunes songs can be streamed via Squeezebox and also Roku for instance. Sonance offers some products in this area too. If you mean iTMS-purchased songs (and there is a BIG difference) then I don't think these devices can do it. So, again you have made Jack's error and jumped to the conclusion that it is Apple's fault. If iTunes lets this stuff work, and iPods let it work, the issue is purely the DRM. And, as I've pointed out above, the DRM you get on Apple stuff is a result of it's agreements with the labels. Did Apple do enough to get freedoms? We cannot know. What we do know is that Apple were the first mass market online music store, and it has been pretty popular (so much so the labels seem to want to renegotiate). But if Apple was completely proprietary, the other products I've mentioned above would not exist or be limited. (On the other side of DRM, I got an invitation from my netflix-equivalent yesterday to join their online vod service. Small print - requires Windows Media player and therefore will not even run at all on Macs or Linux boxes). My guess for what it's worth, is that Apple negotiated hard against the labels to allow whatever freedoms are in the Fairplay DRM today, but that it is contractually quite limited when the limits are potentially breached.

Anyhow, I'm afraid that you and Jack are falling into the group identified in the Ars Technica article I linked to which is that when people hit the limitations of DRM it will be Apple they get mad with, not the people who required the DRM in the first place.

That leads onto your comments on the BW article. Actually BW spoke also to Napster and Real I believe, not just the labels. And come on Charles, is Apple really going to respond to every journalist who calls to argue a quote from a competitor/record label/anyother company? You know that is not practical. But refusal to do so does not permit jumping to a conclusion, in my book. The labels are out to PR themselves and counteract the bad PR they're getting from disgusting things like the rootkit fiasco (which i'd argue has not been covered as in-depth by the mainstream press as it should incidentally). So, they attack the easy targets - in this case Apple. My point is BW didn't need Apple to get back to them, they only had to look at the facts. Music sales are being held up. Why is that? You've pointed out issues yourself - where's Kate Bush on iTMS for instance. I pointed out some others - £9.48 for Robbie's album. The premise that it is Apple's refusal (so far) to do variable pricing is laughable. I would applaud variable pricing. And, I bet Apple would too - IF IT WAS DONE AS THE CONSUMER expects, rather than as the labels expect. And, the failure of other services to make a dent in iTMS if/when it is Apple holding the online business up, is equally laughable. It's just a cheapshot.

Coincidentally Ars (who I have a lot of admiration for as succinct, straight-talking, tech-savvy, AND business-savvy journalists) had an excellent article yesterday on a very similar topic to the BW article -http://arstechnica.com/news.ars/post/20051214-5760.html

I find that article much better written than the BW article. DRM - as administered today at least - is a BAD thing. Copy-protected CD's are a BAD thing. DMCA and other moves by the labels to hurt the paying public are BAD things. Where do you look for these initiatives? It's not at Apple's door and it's not at Microsoft's door. Sure, each is guilty of limiting DRM, but they are the messengers here trying to build a business and also protect a business. The war for fair play must be waged against these labels with a solution for everyone who buys legitimate content. Bashing only Apple, just because it's so dominant and therefore the problems are seen more often, does NOTHING (actually - that DOES harm take-up). It will let in equally bad/worse DRM's. Frustratingly Ars Technica cannot make much of a difference in this, but, actually BW and the Guardian CAN.

I hope this makes it clearer where I stand on this.