A Forrester Went Apple-Picking And Found A Vista

We got some intriguing news out of Forrester Research just before Christmas. They analyzed charge slips over a two-year period (I thought that was a bear rifling through my garbage, turns out it was Josh Bernoff) and concluded that Apple Computer’s monthly iTunes revenues fell 65% in the first half of this year.

Apple doesn’t like its garbage rifled. But Apple also doesn’t give out this kind of information, so let’s blame the victim here and say—as file-sharing advocates do of record labels—“if only they made it available for a reasonable price, no one would have dreamed of going to such lengths to acquire this content.”

So Apple disputed Forrester’s data, saying that there have now been over 1.5 billion iTunes downloads, and that Apple is now the country’s sixth-largest music retailer. Undoubtedly true, but Apple announced back in February ‘06 that they had by then seen over one billion downloads. So the climb from one to 1.5 billion took 10 months. They announced 500 million downloads back on July 18, 2005. So the climb from 500 million to one billion took seven months.

Apple is therefore implying that sales are off about 42%, not 65%. But Apple had sold about 21 million iPods by July 18, 2005, and about 44 million more than that by now. Forrester is basically right that the number of iTunes sales per iPod is shooting downwards.

What does this tell us? It is NOT a hint to short Apple’s stock; the company has never made all that much from iTunes. The record labels get most of that (about 70 cents on a dollar) while Apple makes big bucks on the hardware. No, the message here, folks, is one that Edmund Burke would appreciate, and that Jean Jacques Rousseau would desperately try to explain away. It is that, when average people are not held in check by some oppressive power, they will regress to a natural state of outlaw behavior.

In other words, surely the total number of tunes and videos that users keep on their iPods is not going down. It is probably going up. Sales of recordings on physical media are not going up (though The Onion confirms that Panasonic has introduced a portable 500-disk changer to compete against the iPod). D’oh, now where could all those tunes and videos be coming from?

Time’s up. In other words, the experiment has achieved sufficient results so that we can draw a conclusion: The gift of easy legal downloads and media play that Steve Jobs has given the world is not enough to persuade users to move away from illegal downloads.

In fact, quite the reverse. As newbies to digital music get used to the possibilities, they steal more and more downloads, and they buy less from Apple. It is kind of like how newbies moved away from AOL over time, as they got used to Internet Explorer and Firefox and banging their heads against the phone trying to understand “Mary Jane’s” thick Indian accent on Verizon’s and Comcast’s Bangalore help lines instead of on AOL’s.

The incentive for getting to know Mary Jane was broadband. The incentive for getting used to using Limewire and BitTorrent is free stuff that you used to have to pay for.

The spiritual descendants of Rousseau (“man in the state of nature is noble and good”) will keep arguing this issue, and they will win plenty of debates and change some laws in countries beginning with France, and in the background as they do this noble work their PCs will be stealing lots of audio and video files.

Meanwhile, the spiritual descendents of the aristocracy that paid Rousseau to amuse them (obviously, we’re talking Hollywood here) really need to find themselves a spiritual descendent of the British Empire that Burke roused to defeat the revolution of the unwashed.

And there is only one candidate for this reborn avenging empire of shopkeepers. But it has many names. The Anti-Steve. The Borg. The Blue Screen of Death. Microsoft.

Content owners and creators deride Microsoft like no others. In this they are also like their French aristo forebears. They do not need to stop using their own Macs, but they must get over the stylelessness and clumsiness of their northern cousins and embrace their power to control the mob that has overthrown them.

What would put a dent in content piracy? A biggie is file authentication requirements in the operating system for every media file used in a PC. The PC user starts to bring up the file, either to play it or copy it, and the computer queries for certificates to see if the file is being used with permission of the rights holder.

If not, it offers the user a chance to type in such permission, or perhaps to buy the file. Would hackers find workarounds to this software? Of course. But Microsoft has widely deployed such authentication for its own products since 2003, and not many post-’03 updates of Windows and Outlook have been stolen since then.

It is not known whether Apple—with maybe 3% market share in operating systems, and growing—is moving towards deploying such file authentication in their next generation operating system. That next generation OS is a year or two away, however, at least.

Microsoft, on the other hand, with some 95% of the OS market, has just introduced a new version of Windows. Windows Vista includes file authentication capabilities for media, among other clumsy DRMs. Protected Video Path, Protected Audio Path, HDCP, CGMS-A, Protected User-Mode Audio: All this gunk in the engine will indeed keep most users from driving away with any looted content...and, in many cases, from driving any faster than 20 miles an hour. But the inconvenience of all PC users is a small price for content owners to pay, considering that a very large percentage of those PC users—as proven by Apple Computer’s own sales statistics—are thieves.

Essentially, Microsoft has done everything the Motion Picture Association of America and other content-owner representatives have requested of it. This is somewhat to the detriment of Microsoft’s own interests.

Windows Vista users with most types of monitors sold today, for example, will find they are incompatible with Vista’s output protection management, so they will be annoyed that their perfectly legal HD content will not play through their HD monitor in HD.

Even worse, many files that have been legally acquired will lack certificates that are understood by the system, and will thus either not play or will require such fiddling around to play as to piss off many users. They will blame Microsoft, and some of them will retaliate by buying Macintoshes.

Microsoft could have gone the easy and traditional consumer-electronics way of winking at content piracy issues, asserting the Sony Betamax defense that the main use of the PC is for perfectly legal stuff, and profiting off consumers’ larcenous desires. Apple is clearly doing this with the iPod, as VCR-makers did before it. But Microsoft is a Burkean royalist, and it sympathizes with all those Marie Antoinettes in Southern California. Even if that sympathy seems unreciprocated.

But Microsoft has a little problem with Windows Vista. It is such a huge kludge of a system that it will not sell all that well. It is such a power hog that it will require the purchase of new hardware. Users will object not only to DRM, but also to flocks of early bugs and all the other annoyances that always attend monster-size software releases. Especially those from Microsoft.

Windows Vista will probably eventually achieve big market share. But it may not. Google and Sun will chip away, offering Linux and Web-based applications. Apple is clearly gaining share. Most Windows XP Second Edition users will hold on as long as they can. All not because most users hate Microsoft, but because Windows Vista will be painful to deploy, and because it will not let us steal so much content as we are getting used to.

So here’s a modest suggestion for content owners. You effete snobs ought to be subsidizing every copy of Windows Vista. That’s it, stop holding your nose when you think of Microsoft, and write a check to the richest man in the world. Like phone companies subsidize Motorola and Nokia, you need to pay Microsoft to give everybody cheap locks for their PCs.

Windows Vista Home Basic is expected at this writing to sell for about $200. That’s about how much Verizon Wireless pays to subsidize a Treo sold with a subscription. A big studio or TV network could package a movie download subscription with Windows in just the same way.

Getting Windows Vista Home Basic into 100 million American homes will cost $20 billion. That’s only about $2 billion per major studio, media company and record label.

L.E.K Consulting’s study for the MPAA put that group’s members’ losses to piracy at $6.1 billion in 2005 alone; the RIAA puts the music industry’s annual losses at $4.2 billion.

Gentlemen and ladies, if you truly believe your numbers, you must buy me one of Mr. Gates’s new products before kleptomania gets the better of me again.

Of course, being a wise pundit, I will have my Mac or my Linux PC. But we really need to do something about the rabble. And get them to stop drinking wine for breakfast, too. Oops, wrong century.

Neal Weinstock is editor-in-chief of Weinstock Media Analysis and can be reached through www.weinstockmedia.com.