While all the major record companies reported that digital music was becoming an increasingly important revenue stream this year, a lot of debate on the digital music sector in 2006 centred on interoperability, or rather the lack of it. The problem hit the agenda early on in the year thanks to a debate in the French parliament. At the end of 2005 a bill originally designed to tighten laws on online piracy was hijacked by those with the opposite agenda while much of the French political community was on its Christmas break. As a result proposals were put forward that would legitimise file sharing in return for a levy on internet access and, more importantly, rules were proposed that would stop technology companies from operating proprietary file formats that stop their competitors from selling music that is compatible with their digital music players.
In the end, subsequent debate and compromise in the French parliament meant that the legislation that was passed contained little of the radical proposals, but the whole debate did throw the spotlight on Apple, still by far the dominant company in the digital music space. The interoperability rules proposed by the French would have jeopardised Apple's business model which means that iPod users can only buy DRMed music from iTunes, and iTunes users can only play music they buy on iPods. There was talk of Apple leaving the French market if such rules became law though, in the end, they didn't, so such dramatic measures were not needed. Nevertheless, Apple continues to be criticised by key players in the music space over the lack of interoperability of its business model, although that doesn't seem to stop the majority of consumers opting to buy iPods over rival digital music players. That said, reports published in December suggest the sale of downloads across the board was declining, and a key reason for that might be the lack of interoperability of tracks bought from legitimate download platforms. All of which means that in the end Apple et al might yet have to move on this issue or, alternatively, the major labels will have to accept that the future of digital music might be selling non DRM protected MP3s. I wish they bloody would - because doing so would overcome many interoperability issues and end Apple's dominance of the market overnight.
But despite that seemingly obvious fact, the major record companies remained insistent on the use of DRM in the distribution of their music in 2006. I suppose that's because of the fact that, despite the arrival of legitimate download platforms and a number of legal victories against the makers of P2P software, huge amounts of music continued to be illegally shared between users online every day of 2006. Yep, P2P is not dead. The 'victories' included the closure of a number of once popular P2P companies, mainly in response to the landmark MGM v Grokster ruling of 2005 which made those companies' legal defence against the record companies' litigation less strong. Most notably the once mighty Kazaa finally gave in and agreed to compensate the major record companies for the copyright violation their software had enabled. Nevertheless, the record industry's dispute with the most popular P2P of the day, Limewire, is still ongoing and so file sharing continues. And with the increasing popularity among young music fans of sharing music files between mobile phones via Blue-Tooth, it is likely to continue in 2007, even if the record industry continues to be successful in the courtroom. Which is why key decision makers in major label board rooms continue to insist on DRM, even though everyone else knows DRM is a useless weapon in the fight against P2P.
Despite those reports that digital music sales were slowing down, more digital music platforms came than went in 2006. Coke closed down their download shop, which had been one of the first to launch in the UK, but others arrived to take its place. Most notably in the US, Microsoft's Zune MarketPlace. This is all part of the IT giant's re-entry into the digital music market, after various false starts and unsuccessful partnerships had allowed their usually pretty insignificant competitor, Apple, to completely dominate this particular sector. Their strategy now seems to be to pretty much copy Apple's model - by launching their own proprietary player, the Zune player, which is fed music by its own proprietary download platform, the aforementioned Zune Marketplace. The main distinguishing feature between Zune and iPod/iTunes is that the Microsoft device allows users to share music with friends via a limited-play wifi shared listening thingimy. Whether that is enough to allow Microsoft to properly compete with Apple remains to be seen - with Zune only just launched, and only in the US, it is far too soon to tell. So far the only really interesting thing related to Zune is the deals they have done with the major record companies with regard to licensing music for their Marketplace. They have pledged to pay the majors a share of revenues from the sales of the hardware, ie the players, as well as their cut on download sales. It's an interesting deal which could change the future relationships between the majors and the technology sector - especially if the majors allow non-DRMed music to be sold, which would suddenly give them the upper hand in negotiations with Apple.
With the jury out on whether Microsoft can take on Apple in the digital domain, some reckon that if anyone can compete with the iPod it will be the mobile download companies. With an increasing number of people acquiring phones that double up as MP3 players in 2006, the mobile music download services, while still lacking user-friendliness in the main, might just be the big success story in the digital music world in 2007. Or perhaps that will be the independent download platforms, who again gained more ground in 2006 - eMusic in particular, which started to grow outside the UK - but also newer indie players like the new download platforms launched by the Rough Trade record shops or Ministry Of Sound. Or perhaps it will be the subscription style download services like that of Napster that eventually capture mainstream popularity. Or the new advertising funded free download platform Spiral Frog, announced this year but due to launch next year. Or the much rumoured Amazon download platform that is expected to launch in 2007. Or the also rumoured though denied from within download ambitions of Google. Time, I guess, will tell.
This time last year we would probably have said that the company most likely to succeed would be Russian download platform AllofMP3.com, which certainly had a good year in 2006, until the Autumn that is. AllofMP3.com became increasingly popular at the start of the year, mainly because it sold chart music at cut price rates by using loopholes in Russian copyright laws that meant it didn't have to pay a great deal back to the record labels. Because it did, technically speaking, obey Russian laws, AllofMP3.com claimed to be a legal concern, but the International Federation Of The Phonographic Industry disagreed. Fortunately for the IFPI, US trade authorities were supportive of their cause, so much so they told Russia that if they wanted to join the World Trade Organisation (which they did), they would have to revamp their copyright laws so that companies like AllofMP3.com could not claim to be legitimate. By the end of 2006 Russian authorities had essentially agreed to do just that, though AllofMP3.com is less of a pressing issue now anyway, because in the Autumn the credit card firms announced they would no longer accept payments for AllofMP3.com purchases, meaning the vast majority of the service's non-Russian customers no longer have access. That said, AllofMP3.com haven't given up completely as yet, and may find some other clever loopholes to stay in business in 2007.
Talking of Amazon, which we were, briefly, despite all this talk about download platforms, actually, the big business in online music in 2006 remained the mail order set ups of the likes of Amazon and Play.com. Many of them continue to benefit from that much reported VAT loophole that comes about if you base your operations in Jersey. Despite promises from the government on the channel island and here in the UK, the loophole remains, much to the annoyance of independent record retailers who can't possibly compete with their offshore big boy rivals. Perhaps the authorities will finally close the loophole in 2007.
Interestingly, though, the company possibly hit most hardly by the growing popularity of low cost mail order operations is one of the independents' big boy rivals - HMV - who reported this year that increased competition from the etailers and the supermarkets were having a serious impact on their financial performance. Nevertheless, HMV bosses resisted a takeover attempt, again by Permira, and with the appointment of a new top guy the retailer hopes it can find new ways to compete in the increasingly competitive music retail space. Unlike Tower Records in the US, which closed down operations this year, unable to find new ways to compete with younger rivals.