DRM content limitation is one of the ways companies are exploring ways too protect their assets while still satisfying customers. Apple, Microsoft, are competing to see whose DRM will become standard. Either one will become the permanent, integral part of corporate and internet infrastructure. As far as CD copying protection, many believe CD encryption schemes will never fully succeed and that the solution is to offer sufficient quality, convenience, and value to drive users to new systems voluntarily. Indies allow DRM free downloading while majors like EMI and Universal are still experimenting. However, Amazon has now signed all four majors to DRM-free deals.

Record Companies are built on income from bundles (albums) worth of tracks. But, moving to single track purchases with lower dealer prices will lower cost margins and pose significant problems. In terms of 99 cent downloads, 66 goes to the record company, 13.8 for online sales tax, 6.3 for a joint online license, 5 to the artist, 5 to the aggregator, and only 2.9 to the actual online retailer.

The volume business is pushing multiple purchases with little room for marketing. DRM costs, credit card charges, and bargaining terms for retailers are still likely to improve as the volume of business improves. The recording industry wants Apple to adopt a variable pricing strategy on the size of the artist, but some see it as the record companies wanting to increase prices across the board, only lowering prices on artists that are very infrequently purchased anyways.

Another problem is that buying a physical CD on sale somewhere is still cheaper than downloading it legally. It is argued that variable pricing is needed for downloading to grow and maintain the record companies core business models (selling albums). Providing packages would encourage greater purchases, but there is still little concrete data concerning the public’s attitudes towards digital download pricing.

Universal has reduced the prices it charges to retailers on older albums, but iTunes singles download pricing will not be affected. Universal albums in some places have been reduced to 4.82 from 7.99. The EU has also investigated whether iTunes has violated competition rules because each country had its own store and consumers were only allowed to download music if they had a credit card from a bank registered in that country. Accordingly, Apple will cut its prices in the next six months.

Fixed line digital models now come in two forms: subscription based (Napster, Rhapsody, Yahoo) or a la carte (iTunes). A la carte is now six times cheaper than subscription based but is still used only as a compliment to physical purchases. iTunes dominance is really only hardware driven. With 6M songs, 80% of the global digital music market, and 6B downloads so far, they are seeing an average of $3 per transaction and $35 spent annually by the average consumer, far less than a 10/month subscription service. The Microsoft Zune is based on a proprietary closed system. Universal is to get a cut of Zune sales in exchange for licensing its content for limited wireless sharing. Microsoft will be chasing similar deals with other record companies in the future. Amazon has launched a DRM free download service in USA and is marginally cheaper. Hardware makers and mobile carriers are to absorb 5/month for a free all you can eat service.

Subscription based services are the future, dominant, “free” feeling model that can build community by allowing more choice and encouraging experimental listening, as proved by the recent surge in classical music across the board. Napster is based on subscription lapse restrictions. Consumers are actually using the service as a replacement to physical purchases. Napster is now ahead of Amazon and Zune Marketplace. In the Napsters deal with mobile service provider, users are charges a fee for songs, which has created Britain’s largest full track mobile music download service. Consumers no longer have to use a computer to transfer music. Emusic offers a “subscription to own” model with DRM-free tracks for 25+ consumers who are interested in owning music beyond commercial artists. MySpace majors will own a minority stake in the joint venture and will make their entire music catalogues available. Visitors to the site are able to listening to streaming music which will be paid for with advertising revenue. A subscription based download component is also being considered.

In terms of future challenges, early adopters are still driving the market, so the issue is trying to convert the masses. High disposable income consumers still only sample online as opposed to buying full albums. The need to attract younger buyers with portable subscription services may be the solution. Companies will also need to develop attractive services to retain and grow the market.

Portability is also a growing issue. The need to attract younger buyers to legal downloading has been clearly identified and portable subscription based services with built-in CD timer protection software may be the answer. Marketing will be crucial in convincing consumers accustomed to physical purchases and shift their perception from music owning to music renting.