DRM Music: Apple vs Microsoft, a Tale of Strategy

There’s a major strategic difference between Apple and Microsoft: Apple wants to own the user experience from end to end and Microsoft only wants own the software bit. The origins of Microsoft’s strategy are easy to explain and Apple’s approach has its advantages. Microsoft’s strategy proved to be the winning one in the past. Will history repeat itself in the DRM music business? Microsoft’s success originated from one single deal made with IBM, somewhere back in the eighties. IBM was creating the first PC and it needed software. Bill Gates jumped in and instead of selling their software, he licensed it non-exclusively to them. It’s this subtility that made Microsoft to what it is today. If they’d have sold their software they would have gotten money for it only once. The power of non-exclusive licensing is that they get paid for the software that’s installed on each PC sold with their software. Additionally, they’re free to also let other PC vendors (which didn’t exist back then) license their software. Once IBM PC clones popped up Microsoft came out as the big winner. IBM PC sales dropped, but Microsoft’s software sales grew. All these PC-clones also needed Microsoft’s software. Microsoft made sure they owned the software part of the PC market and delegated the hardware to a big group of competing vendors.

Around the same time, Apple developed their computer, which later would become the Macintosh. Apple, contrary to Microsoft/IBM, chose to supply both the hardware and the software. And they still do. Apple’s software can, and is only allowed to run on machines produced by Apple. Apple chose to own the full user experience, hardware and software. Because of this they can very nicely integrate both. You don’t end up with the greatest common denominator. They can nicely balance the workload over the different components in the system. If you have used an Apple machine for a while you’ll see the result. You really feel that the OS understands the hardware it runs on. Everything works nicely together. No drivers to install. It just works. The drawback is that, because of the lack of competition in the “Mac world”, Apple stuff usually is more expensive than PC stuff.

In the end Microsoft won the desktop battle, in the sense of making the most money and that virtually everybody uses PCs with Microsoft software these days.

Apple doesn’t just pursue their owning the full user experience strategy in the software/hardware area. If you look at the iTunes Music Store, you’ll see the same there. Most online music stores are web applications. You go to their site, look up your song, buy it and download it to your hard drive. Then you put it on your MP3 player and play it. It’s not a nice user experience, too many steps are needed. Sometimes these sites also offer additional software that aid you in downloading the ordered music, but then you still have to put it on your player yourself. Because the online music stores only own the website part, they can’t own the full experience.

Not so with Apple’s iTunes Music Store. Apple integrated the iTMS into their music jukebox software iTunes. Although the music store largely is a website, some parts take advantage of the iTunes software around it. The catalog for example, or listening to previews. Also, ordering a song is just one click. One single click will order the song, download it and add it to your music collection. If you have an iPod, it will put it on that too. It works great because Apple owns all the user experience parts and integrated them nicely.

Music files purchased at Apple’s iTunes Music Store are protected music files. You can only play the music on so-many computers and hence it’s harder to make illegal copies. This idea is called Digital Rights Management (DRM). For protected music there are two major formats: AAC (by Apple) and WMA (by Microsoft). iPods only play AAC, the new range of windows media players only play WMA.

Recently, Microsoft joined the DRM music game. Like they did before, they chose not to own the full user experience, but only the software bit. There are multiple stores where you can buy WMA music, like for example Napster and their own MSN Music store. Also, soon the market will be flooded with dozens of different devices supporting Microsoft’s Windows Media format. Microsoft, once again, chose to do only the software. They leave the rest to a group of competing companies.

Right now Apple’s iPod has the biggest market share in MP3 players and so has their iTMS in online music stores. But once Microsoft has fully deployed their music strategy and associated range of music devices, what will happen? Will Apple win this time or will history repeat itself?

There are two factors that are important here:

  1. If you own a windows media device, which won’t play Apple’s AAC format, you probably will use a music store that offers windows media music. Buying music in Apple’s iTMS will make you end up with files that won’t play on your device. If you own an iPod, you’re more likely to buy your music at the iTMS, as the iPod doesn’t play WMA files.
  2. If you bought AAC music (and don’t yet own a music device), you’d probably buy an iPod, because it will play your purchased music. This is how Apple makes money off of their music store, it’s not the music sales. Once you purchased music at a windows media music store, you’ll probably prefer a windows media device.

This means that Apple is ahead right now. Their iPod has 70% market share of all MP3 players (and 90% of all hard disk players). So, if owners realize their iPod will only play Apple’s AAC files, they’ll buy music at the iTMS. Microsoft can do a couple of things to turn things around:

  1. They’d have to make sure the market is flooded with windows media devices. And that’s what they’re doing already, it’s what they’re good at.
  2. They have to get people to own protected windows media files. Once they own windows media files, iPods will be less tempting, and they’ll probably buy a windows media device. Once they have such a device, they’ll also stick to windows media stores. Apple applied this principle for their store in the USA a while ago by giving away free music credits for the iTMS with one million bottles of Pepsi Cola.
  3. They have to get online music stores going that integrate well into their products. The user experience has to be streamlined. Windows Media Player 10 can already synchronize music with windows media devices and MSN Music is sort-of integrated. I’m not sure how well it works, though.

Who will win is hard to predict. Looking back you might think that it it will be Microsoft once again, they have the strategy that seems to work best, right? On the other hand Apple’s iPod has an incredible market share. And once people own iPods, the iTMS is much more attractive, also because of the buying experience. Only time will tell what’ll happen.