Is DRM Really What's Eating Apple?

The final curtain may eventually fall on the drama of digital rights management, but for now it's slowly playing out in various courtrooms around the globe.

Although DRM issues are not exclusive to Steve Jobs, et al., Apple (Nasdaq: AAPL) invariably takes center stage as prosecutors pontificate on the evils of corporate greed, using the iPod/iTunes combo as a favorite example. "FairPlay," says Apple; "Crippleware," counter its critics.

After the final act, will anything really change?

Perhaps -- but not necessarily because of court orders.

"In the long run, Apple might change its stance on content protection and e-commerce -- not because of these lawsuits, but because of business drivers," Harry Wang, a senior analyst at Parks Associates, told MacNewsWorld.

Home Is Where the Money Is

"Once Apple becomes not just a music distributor, but a digital home entertainment company, its protectionist stance will eventually hurt its chances to become a bigger player in the digital home space," Wang observed.

The digital home space is a much bigger industry, and by most accounts, analysts expect it to top 50 million U.S. households by the year 2011.

"Apple needs collaboration from other players -- namely content owners, CE (consumer electronics) manufacturers and distributors -- to make a serious play in the digital home space," noted Wang.

"The most likely scenario, if Apple is serious about its digital home bid, is that it will join some kind of DRM interoperability alliance to allow other players to access Apple-controlled content and its hardware platform," he added.

However, that scenario is two to three years away from now, in Wang's view. In the meantime, the court drama plays on.

The Winning Verdict

If Apple hasn't come to terms with the futility of maintaining its stranglehold on its own, the courts -- especially if there is a verdict against Apple -- could provide much-needed intervention.

"The impact of the lawsuits could potentially result in Apple joining hands with other players," Frost & Sullivan Research Analyst Zippy Aima told MacNewsWorld. "If that happens, a major issue of interoperability faced by both vendors and consumers could be resolved."

Short Hurrah

While consumers would likely cheer the convenience of convergence, the celebration could be cut short by a higher price tag.

"If the writing is truly on the wall, Apple will open up the iTunes DRM to non-Apple hardware," said Michael Wolf, digital home research director at ABI Research.

"But since Apple makes the majority of its revenue on the hardware and not on content," Wolf told MacNewsWorld, "they would have to make up the difference in high licensing fees and possibly even have to raise content costs in the iTunes store."

Still, consumers probably don't need to sweat higher iTunes song and video costs just yet.

"Apple will resist changes to the model until all legal routes have been exhausted," predicted Wolf. "I assume Apple will even get the U.S government to go to bat for it."

What's the DRM Difference?

The DRM rub affects companies other than Apple.

"Most commercial content is protected by one DRM scheme or another," Parks Associates' Wang pointed out. "In addition to Apple, RealNetworks (Nasdaq: RNWK), Microsoft (Nasdaq: MSFT), Sony (NYSE: SNE) and many small vendors provide DRM technology to protect and monetize their digital content."

So, why is Apple at the defense table more often than the other players?

"Apple's dominance in the digital music industry and stubborn stance on bundling iPod and iTunes through 'FairPlay' makes it a ready target for DRM controversy," explained Wang.

Which Issue Is the Issue?

In court case after court case, it is the bundling that trade and consumer advocacy groups want to unravel, not necessarily the DRM issue itself.

"Since Microsoft licenses its DRM to companies who make hardware, there isn't nearly the same issue," notes ABI's Wolf. "Apple locks the consumer to its own hardware to play its content. Microsoft and RealNetworks do not do this."

So, the problem spurring the DRM lawsuits isn't with DRM -- it is with Apple's monopoly.

Indeed, other industry players have highlighted the problem with Apple merely by building a different model.

"Microsoft created a 'PlaysForSure' program to allow content and device partners to benefit from its DRM technology," said Wang.

Portability vs. Profitability

Since the legal fight boils down to how many brands of hardware can play iTunes content, the final verdict in any of the courts most likely will fail to resolve the larger DRM issues. Consumers will still be left to chafe at paying multiple times for the same content, regardless of the vendor.

For example, technologies like the Slingbox can shift time and presence so that cable programming paid for at home can be viewed by the consumer on a mobile phone, laptop or other device while away from home.

Cable companies are screaming foul -- as are artists and content providers who depend on royalties based on air play. Carriers also want to make money from playing this outside-the-network content. Yet, the consumer feels the content is already paid for and therefore should be viewable anywhere.

Continued convergence inside and outside the digital home space will only exacerbate this conflict of interests. However, buried in this dispute may lie Apple's best DRM play yet: a move to renting content rather than selling it.

Rent or Own? A rental model would render most of the lawsuits moot, as the legal arguments hinge on the concept of ownership. The complaint is based on the consumer's right to play purchased content on any device. Remove "purchased" and "ownership" follows suit.

In the end, Apple probably will change, but it is unlikely that any judge will force its hand.

"It is too early to predict what the tight-lipped Apple will do next," says Frost & Sullivan's Aima.