Five ways Apple Convinced the Music Industry to Overlook Piracy

For over a decade a battle ensued between the Netizens who want unencumbered access to purchased music streamed to the device of their choice and the stalwart music industry who protect against piracy and profits. At times, this battle has gone extreme with billion dollar lawsuits targeting file sharing tools and teenagers having to hire lawyers.

Apple has made a remarkable dent in what seemed to be an impossible impasse. Google, Amazon, and others have tried – How did Apple succeed?

I have a theory. First the timing is very important.

Google and Amazon threatening to bypass the Music Industry entirely. Despite trying to negotiate for years they are arguing that music files can be seen as “just bits” so they really don’t need permission. This is a huge threat to the industry who want music to be seen as a license independent of the bits.

Piracy is rampant. The record industry will still go after the Mark Gordons / Limewires of the world but public outcry is preventing them from going after individuals directly without overwhelming physical evidence.  Apple is a BIG customer and can have impact. They proved this with the Beatles digital release which increased US album sales by over 5% reversing a downward trend in music sales . ITunes has been a strong record industry alley and is an important growth channel.

So how did Apple finally convince them?

They probably argued (with a lot more data) that there are 4 key segments:

  • “Professional Pirates” who profit directly or indirectly from piracy. These are the Mark Gordon‘s, Pirates Bay, etc. who are universally considered evil by the digital media industry.
  • “Occasional Pirates” who would prefer to be legit, but won’t pay retail and don’t see piracy as particularly wrong.
  • “Good Netizens” who spend money on iTunes, rip purchased CDs and find high value in ubiquitous streaming services
  • Many “Potential Netizens” who could be willing to purchase more digital music and are open to micropayments but haven’t joined the digital frontier.

Apple could have argued the following points:

  1. If you don’t allow good Netizens to stream they will be lured into piracy.
  2. This is an opportunity to convert few Occasional Pirates, many Potential Netizens and sell even more licenses to Good Netizens. The last few years of iTunes sales have proven successful in building this case.
  3. Occasional Pirates will pay the $25 / year to help recoup revenue lost to piracy (rumor is that Apple keeps only $7.50 of the subscription fee.)
  4. The industry shifts the paradigm from digital music being about “owning bits” to owning licenses.
  5. Here is the kicker … this can help them shutdown Professional Pirates.

How will this hurt professional piracy???

iTunes Match scans the encoded bits and “matches” it to a legitimate music license. iTunes Match could create a hash value or digital fingerprint to uniquely identifies any file. Since there are many tools to rip a CD, Apple will be able to tell if a file came from a shared network or is relatively unique (created by the user or a shared among a small group.)

By scanning everyone’s drive, Apple can create a comprehensive hashing database which will quickly identify a frequently shared file from a self- made CD rip. In fact, the only way the record industry could accomplish this is by having a massive aggregator like Apple scan everyone’s hard drive (I suspect Apple negotiated a lockout agreement to prevent Amazon and Google from joining the program for a period of time.)

If iTunes match sees a file that is identical to thousands of others and you don’t have a verifiable license it can protest. If you have hundreds or thousands of these files you might get a cease and desist note or have criminal charges brought against you.

This allows Apple to amassed the largest piracy and usage information database imaginable adding to its already enormous supplier power. Users are also locked into Apple since the matched license is only valid in iTunes.

IMHO there are some big problems with this theoretical piracy database. Its quite easy to modify the file and make it look unique – a simple tool can be used and a reasonably sophisticated user can bypass this system. I’m sure Apple and the music industry know this, but perhaps they have a plan to address it.

The good news is that the digital genie is out of the bottle and the shift in paradigm from bits to licenses will begin to transform the digital media industry. It’s about time.