A PPLE C OMPUTER S O NLINE M USIC V ENTURE

On April 28, 2003, Apple Computer, Inc. introduced a new version of iTunes, the companys innovative digital music jukebox software. This fourth major revision of iTunes included a surprising new feature, the iTunes Music Storea vast collection of digitally encoded song files from all the major U.S. record companies, available for download at a price of 99 cents each. Customers could choose to download complete albums, usually priced at $9.99. The iTunes Music Store sold over one million songs in the first week, despite it being exclusively available to Macintosh usersroughly 5% of the personal computer market. This marked a major shift in power and distribution of songs within the music industry, and brought issues of copyright and fair use to the foreground of major media outlets.

Background and Industry Overview MP3s By the middle of 1995, MP3shighly compressed digital audio filesbecame commonly
available over the Internet and were small enough to be easily downloaded by users, even using the relatively slow modems of the day. The file format was the result of several audio encoding and psychoacoustics projects funded by the European Union, culminating in the Moving Picture Experts Group (MPEG) specification MPEG-1 Audio Layer 3. The roughly 10:1 compression rate allowed by MP3 encoding resulted in song files typically in the range of 3 to 4 megabytes, or about 1MB per minute of audio. Mass storage capacity grew rapidly while the cost per unit of storage dropped at an exponential rate. Late in 1998, the cost of storing a complete music album on a hard drive equaled the cost of buying the same album on CD. This key figure, along with growing networks on college and university campuses and consumer broadband services, proved to be the tipping point for MP3 popularity.

Napster By 1999, MP3 had become a household word on campus networks and personal computers.
However, music lovers who were seeking MP3s experienced difficulty in finding the files. Software such as Nullsofts WinAmp and Panics Audion allowed users to createor riptheir own MP3s from audio CDs, and many MP3 players existed, but no one had developed a good way of finding the millions of MP3s that existed on the Internet. Then, in the fall of 1999, Shawn Fanninga then-19-year-old freshman at Northeastern Universityreleased Napster to the world as a free download. The softwarea type of peerto-peer (P2P) network applicationspecialized in finding MP3s by storing a list of all users MP3s on a central server, and then allowing any connected user to search and download those files directly from other computers online. The softwares popularity grew quickly and made file trading so easy that by December of 1999 several major record companies in the U.S., claiming copyright infringement, filed lawsuits against Napster. The record companies sought to disable Napsters service despite the fact that the companys servers did not actually host any of the copyrighted material in question. By the second half of 2001, Napster had lost its court battles and was effectively shut down. The remaining assetsthe name, some intellectual property, and hardwarewere sold to Roxio Inc., a software company known for its CD burning applications. Subsequently, Roxio sold its consumer software division and renamed itself Napster Inc.

The RIAA Fights On Even before the Recording Industry Association of Americas (RIAA) lawyers
succeeded in shutting down the Napster P2P network, many similar applications began appearing on the Internet as free downloads. One popular Napster clone, Kazaaowned by Sharman Networksgained the most notoriety from its legal battles around the world. Despite some affirmation from U.S. federal courts that similar P2P software had substantial non-infringing uses, Sharman Networks saw nearly continuous litigation after purchasing the rights to Kazaa.

A major factor that swayed consumers away from networks of copyrighted music files was the RIAAs increasingly public campaign of dissuasion by way of lawsuits and threatening letters. In one infamous case, the RIAA brought suit against 12-year-old Brianna LaHara, who was living with her mother in a lowincome Housing Authority apartment. Fearing a public backlash, the RIAA lawyers quickly settled out of court for only $2,000, substantially less than the $150,000 per song in damages they normally sought. Since a federal appeals court ruling in December 2003, the RIAA has been unable to force Internet service providers (ISPs) into divulging the names of specific users thought to be violating copyright laws. Still, the RIAA continues to send out threatening letters and to file lawsuits against John Doe, specified by Internet addresses.

Reinventing the Wheel iMac After Steve Jobs highly publicized return to the computer company he co-founded in 1976, he set
about reviving the languishing Macintosh computer line. By first cutting the number of products offered and then stressing the importance of innovation, Jobs managed to turn around the Macintosh unit, which launched the all-new iMac personal computer to great fanfare and accolades in mid-1998. By the beginning of 2001, the iMac computer line had become very successful, and the design had been refined to include a CD-RW drivean optical drive capable of both reading and writing to inexpensive CD media. By October 2001, all of Apples computers featured CD-RW drives, allowing users to backup valuable data or to burn their own music CDs.

iTunes On January 9, 2001, Steve Jobs announced the availability of iTunes, then Apples newest
software, free for any Macintosh user to download. iTunes was touted as the Worlds Best and Easiest to Use Jukebox Software. Macintosh users downloaded almost 300,000 copies of the digital music jukebox software within the first week. The copies were widely regarded as the first user-friendly solution to issues related to creating MP3s, like playing, organizing, and even burning them to blank CDs. iTunes also showed how wonderfully simple and elegant a well written program could be on the Macintosh platform. One of the most important features of iTunes, overlooked by many at first, was the ability to transfer songs from the computer to one of many popular portable MP3 players. MP3 players were quite popular digital music players; they were incredibly small and light, but could only hold one or two albums of MP3s at a time.

iPod Eight months after the first release of iTunes, Apple announced the iPod, a portable digital music player
based around a tiny new hard drive technology that enabled the device to store 5 gigabytes (5GB) of data roughly 1,000 songsat a time. Many PC users admired the simplicity of the iPods design, which used a simple scroll wheel for all navigation, and its tight integration with iTunes software. However, many people also complained that the $399 price tag would guarantee the failure of the Mac-only device, even though it had many advanced features not found on competing devices and was much more compact than any other device that offered 5GB capacity. Subsequent events proved these naysayers wrong. In less than a year, Apple introduced a Windows-compatible iPodessentially identical to the Mac versions, but with MusicMatch software instead of iTunes. By July 2003, sales of both Mac and Windows iPods reached 1,000,000 units. After July 2003, sales increased sharply, as Apple sold 1 million iPods roughly every four and half to five months. Apple quickly developed additional iPod devices, having four distinct offerings in the iPod product line by early 2005. The iPod holds up to 10,000 songs, coming in 20GB and 40GB models, whereas the iPod Mini holds 1,000 songs. The iPod Shuffle comes in 512MB or 1GB models and plays up to 240 songs in random order. The iPod Photo comes in 40GB or 60GB models holding up to 15,000 songs or 25,000 photos. All of the devices can be used with Mac OS X or Windows 2000/XP computer operating systems. Moreover, music can be imported in a variety of formats, including MP3, Advanced Audio Coding (AAC), and Apple Lossless Encoder. As of early 2005, Apple has sold over 10 million iPods.

iTunes Music Store The iTunes Music Store was launched on April 28, 2003. It initially featured
over 200,000 songs from all of the major record labels and allowed users to download either individual songs or complete albums, for 99 cents and $9.99 respectively. It was originally only available to Macintosh users, as the iTunes software had not been released for Windows computers. Some people doubted Apples ability to make any headway in the market, because of the limited user-base, and the fact that Apple was not the first company to try a legal download service for music. Despite these issues, Apple managed to sell over one million songs within the first week. The opportunity for additional, potentially substantial sales growth occurred with Apples release, on October 16, 2003, of the first version of iTunes to support Windows-based PCs. Apple also announced that it would fully support the iTunes Music Store and all versions of iPods. Since late 2003, the iTunes Music Store has enjoyed significant expansion. Via the Internet, the iTunes Music Store is open 24/7 for music downloads and, as of early 2005, has sold more than 230 million songs. With more than one million songs available for downloading, iTunes Music Store has hundreds of thousands of songs from major music companies, including EMI, Sony/BMG, Universal, and Warner Bros . . . [and] more than 100,000 new tracks from independent artists and record labels. According to the Apple Web site, the iTunes Music Store allows users to quickly find, purchase, and download music. Users can burn individual songs on an unlimited number of CDs, listen to songs on an unlimited number of iPods, and play songs on up to five Macintosh computers or Windows PCs.

Digital Rights Management Apples successes with the iTunes software, iPod music player line,
and iTunes Music Store did not occur without grappling with the thorny issue of Digital Rights Management (DRM). By the spring of 2002, DRM was an important concern for music lovers, music content owners, and technology companies. DRM doesnt mean just basic copy-protection of digital content (like e-books, MP3s, or DivX videos), but it basically means full protection for digital content, ranging from delivery to end users ways to use the content. In terms of music, companies wish to develop a product which would allow record labels to sell copy-protected audio tracks over the Internet, so that only the buyer could be allowed to listen to the tracks. This desire on the part of music companies runs counter to national laws that traditionally have required record labels to grant fair use rights for their products. Fair use means that a customer must be allowed to make personal copies of the purchased music for use in a car, in a portable digital audio player, on a desktop or laptop computer, and so on. Typically, this problem has been solved by permitting the user to make a specified number of copies of the original file but disallowing additional copying of the files. Apples implementation of DRM technologythe code that permits (or limits) uses of copyrighted material in the digital worldrepresents a compromise of fair personal use and property rights for the users and copyright holders. Originally, in order to get all the major record labels to agree to Apple selling music online, Apple proposed a system that would limit the uses of the downloaded material, but only enough to inconvenience the true pirates of copyrighted music. The system allowed a customer to copy each music file an unlimited number of times in order to backup the file or move it from one home computer to another. The only limitation was that no more than three computers could be enabled to play the song at a time. In addition, the system allowed users on a network to stream their entire music library to any number of friends or strangers. Streaming enabled network users to listen but not copy, much like listening to the radio. Finally, the system allowed users to burn as many as 10 copies of a full downloaded album, after which point the user could continue to burn those songs as parts of a mix, but not as an original album.

iTunes users soon discovered that they could stream music from other users across the entire Internet. Web sites such as ShareiTunes.com and iTunesdb.com offered free services that let users browse all the available streams of users online, effectively letting anyone with iTunes listenfree of chargeto any song available. Apple responded by releasing a new version of iTunes that partially crippled the network streaming abilities, as well as reworking the structure of other DRM codes. As a result, users could freely stream from any other iTunes user on their network segmenttypically each floor of a dorm or each householdbut not across the Internet. Also, each copyrighted album could only be burned to a CD seven timesdown from 10 times. In the users favor, however, Apple increased the number of enabled computers from three to five. All songs could still be loaded onto and played from an unlimited number of iPods, allowing friends with extra capacity on their iPods to share complete music libraries. Matthew Haughey of the Creative Commonsa group dedicated to the protection of public domain and fair use rightsreported on DRM technology in a May 2003 interview of actor, writer, and technology guru Wiley Wiggins. Wiggins offered the following observation on DRM technology and Apples application of it in the iTunes Music Store:
Well, for all the flack it might get on Slashdot, I think Apples Music Store is a pretty open and moderate use of DRM that keeps both nervous companies and users fairly happy. Ill support it in the hopes that the music selection grows, and because I think Apple has one of the more benevolent attitudes towards sharing information of the big media/computer conglomerates. . . . I can only hope that these technologies are used more in this style, as opposed to silly, broken formats that wont let you burn CDs or copy music off more than one computer. Unlimited [burns of] CDs and [use in] iPods is a step in the right direction.

The Future of DRM and Apple Major questions remain regarding the future of consumers fair
use rights, the long-term impact of DRM software, and Apples role in both. Many in the music industry have applauded Apples pioneering of digital music and its moderate use of DRM, thereby maintaining consumer rights on some level. However, Apples model of consumer rights has already changed once, and its terms of use and end user licenses dictate that the company has the right to change its model in the future, retroactively modifying consumers rights to previously purchased music. Considering growing competition in the marketplace, the interests of the big four record companies, and the advantage of online music providers with the record companies, the future of DRM is far from certain. As the market for digital devices has evolved, most music players either have no DRM protection at all or have a proprietary method as with Sony and Apple devices. People who have an iPod device can use only the music in the format delivered by iTunes, yet the music in iTunes Music Store is available to anyone with a Mac or a PC. Moreover, consumers can buy music online from a variety of different platforms and retailers supported by Windows media. For instance, liquid.com, Napster, Wal-Mart, MusicMatch and so many others, many of which are selling their songs for less than 99 cents. In 2004, Microsoft instituted a DRM program named Janus that allows consumers to buy content directly over the Internet for their handheld devices without going through their PCs in order to connect to their music stores. Apple does not have a hand-held device that communicates that way. In addition, Janus includes the delivery of audio, video, and textsomething that Apple indicates is not in its plans. Microsofts attempt to establish a standard with Windows Media Player has been greeted with suspicion by the consumer electronics business. In late January 2005, the four largest consumer electronics companies announced an agreement to adopt a common DRM method that would enable copy-protected music and video to play across devices from any manufacturer.

In February 2005, John Borland, a columnist writing about technology and the music business, commented, Today, online music purchasers have to make sure they are buying from a store thats compatible with their MP3 player. Music from Microsofts MSN Music Store cannot be played directly on the iPod, for example. Also in February 2005, Michael Robertson, who helped create the early digital music wars with his MP3.com site, announced his intention to establish an online music store that provides music without any copyright protection. Robertson indicated he would open the service with hundreds of thousands of songs from independent and unsigned artists. The price per download will be 88 cents11 cents less than from iTunes Music Store. Robertson intends to approach the major music labels as well, even though they have adamantly opposed selling any songs online that are not wrapped in DRM technology. Apple has certainly created a name for itself in the digital age of music, from the first user-friendly solution to building, managing, and sharing a music library, to the now ubiquitous white headphones of the iPod digital music player. Even though Apple may have struck a delicate balance of consumer rights versus copyrights, that balance may only be temporary as the competitive pressures of the marketplace continue to unfold.

Questions for Discussion

1. How do (a) the technological configuration of the iPod product line and (b) usage applications of the iTunes Music Store serve consumers and, at the same time, restrict their freedom? 2. What are the ethical implications of Apples marketing of the iPod product line and sale of music through the iTunes Music Store? 3. What is Digital Rights Management, and what ethical issues does it raise for Apple Computer and other providers of online music? 4. In your view, how will the battle over Digital Rights Management likely unfold in the future?

Sources
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