Analyst on DRM-free iTunes downloads

Apple's choice to offer DRM-free tracks from major record label EMI is a positive move for the company that will drive further iTunes sales and potentially increase the number of iPod purchases, according to senior analyst Gene Munster of research firm Piper Jaffray. "We believe the success of the iPod is dependent upon the total experience of the device and the music store, vs. the fact that the iTunes music only play son iPods," Munster wrote in a research note obtained by MacNN. "We estimate that less than 5 percent of the music in the average iPod user's library includes music purchased from iTunes." Piper Jaffray maintains its 'outperform' rating on Apple shares with a price target of $124.

The analyst says DRM free music will likely have a positive impact on iPod demand, given DRM-free music should result in more usage of digital devices. Additionally, the impact of increased iTunes downloads will outweigh the impact of some customers using non-iPod players with iTunes downloads, according to Munster.

"We expect increased iTunes music sales, because the removal of DRM takes away one barrier to entry into the iTunes+iPod ecosystem," Munster wrote. "This effect could also result in more iPod sales as consumers have positive experiences with iTunes+iPod and the overall move to the digital music world gets easier."

In the short term, however, the analyst believes the public will perceive a negative impact on iPod sales because consumers can play EMI's iTunes downloads on any digital music player. Despite the interoperability of EMI's tracks on iTunes, however, users still cannot sync those tracks with their player the same way iPods do.

"Our belief [in] the success of the iPod is not because consumers are locked on the iTunes platform, but its success has been because of the total device and iTunes experience," said Munster.

More iTunes downloads

DRM has historically been one reason consumers shy away from purchasing digital music from iTunes, and Apple has come under intense criticism for selling music that only plays on its iPod. Several Scandinavian countries led by Norway are steadily applying pressure to Apple, hoping the Cupertino-based company will open up its closed iPod+iTunes ecosystem to competitors by allowing consumers to play iTunes tracks on any player.

Today, EMI announced that it is making new downloads available in a high-quality DRM-free format via the iTunes Store, spurring an immediate response from senior advisor Torgeir Waterhouse of the Norwegian Consumer Counsel. Waterhouse applauded EMI and Apple for their bold move to offer DRM-free music, but said Apple is still required to meet the deadline set in late September to comply with Norwegian law.

Impact on iPod sales

The removal of DRM from EMI music on iTunes will ensure that those downloads are compatible with non-iPod MP3 players, worrying some industry watchers that consumers will purchase iTunes tracks only to play them on non-Apple hardware. Apple's revenue in the digital music industry has come almost entirely from iPod sales in the past, with the iTunes store operating at "above break-even."

"While this enables savvy users to put iTunes downloads on their MP3 player of choice, it will not sync as simply as an iPod does in iTunes," Munster wrote. "We believe this will keep most users from using MP3 players other than iPods with iTunes."

Filed under: Apple