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This morn­ing, the EMI Group announced that they would begin offer­ing their music library for sale online with­out DRM. Not only that, but the DRM-free files would be encoded at a higher bitrate than their “pro­tected” coun­ter­parts. Of course, this comes with a cost. Rather than the now-standard $0.99 per song, these files (which cer­tainly do offer more to the con­sumer) would be priced at $1.29 per song.

As I was read­ing this, I began to think about what the real value of a dig­i­tal music pur­chase is and whether the cur­rent pric­ing model makes sense, so I looked up the num­bers. What fol­lows are my results.

To prop­erly con­sider the value of a down­loaded track, you must first know the value of that same track on a phys­i­cal CD. Accord­ing to the RIAA’s own num­bers, the aver­age price of a CD in the year 2005 was $14.91, which I will be round­ing off to $15 for the sake of sim­plic­ity. Dave Tay­lor tack­led this ques­tion using his per­sonal col­lec­tion and found an aver­age of 12.5 songs per disc. Again round­ing in the favor of the RIAA, I’ll just say 12 for the pur­pose of this arti­cle. This gives us an on-disc value of $1.25 per song, on average.

Now we should define what the CD is. It is an uncom­pressed rep­re­sen­ta­tion of audio, using two chan­nels sam­pled 44,100 times per sec­ond at a 16 bit res­o­lu­tion. It is stored as stan­dard PCM audio with absolutely no encryp­tion or DRM, and can be con­verted to other for­mats by a wide vari­ety of free and com­mer­cial tools.

Based on the above, one CD qual­ity, DRM free audio track should be sold online for around $1.25 . Some argue that since you are not get­ting the phys­i­cal media, liner notes, etc. that a down­load is worth less. I dis­agree, because of the con­ve­nience. I can have my down­loaded song NOW, any time day or night, and I don’t have to go through a poten­tially com­pli­cated process to import the audio to my com­puter and/or put it on my portable audio player of choice. Con­ve­nience is worth money, and I argue that it bal­ances out the lack of phys­i­cal con­tent and dras­ti­cally reduced dis­tri­b­u­tion costs.

Obvi­ously dis­trib­ut­ing the raw CD audio online is waste­ful at 1.4mbit/sec, but this is where loss­less audio com­pres­sion comes in to play. Using an encoder such as FLAC, the file size can be cut in half on aver­age with absolutely no decrease in sound qual­ity. If you com­bine loss­less audio with an appro­pri­ate cue sheet, you can burn a CD that is bit-for-bit iden­ti­cal to the retail pack­aged ver­sion but took half the space on your hard drive and half the time to download.

Some may be won­der­ing “where do band­width costs fit in all this?” After research­ing the costs for big band­width at a colo­ca­tion cen­ter, I’ve deter­mined that band­width is basi­cally neg­li­gi­ble in all this. At a Level(3) dat­a­cen­ter near my loca­tion, for large con­sumers (as an online music store cer­tainly would be) band­width runs about $240/TB. That’s under 24 cents per giga­byte, mean­ing that a full CD worth of loss­lessly com­pressed audio would incur roughly eight cents of band­width cost and for sin­gle tracks the cost goes below one cent. Tracks sold with lossy com­pres­sion would cost even less, eas­ily going below one cent per album if com­pressed to a level more suited for flash mem­ory based portable players.

Back to the main topic, since we’ve now deter­mined that DRM-free per­fect copies of the CD audio are worth $1.25 on aver­age, what about lossy com­pres­sion or DRMed tracks? Both lose value to the con­sumer, arguably more is lost from DRM than com­pres­sion because DRM lim­its the num­ber of devices the con­tent could be played on, where lossy com­pres­sion only makes it sound a bit worse (which some peo­ple wouldn’t even notice).

I’m going to start with lossy com­pres­sion, since it’s the most straight­for­ward in my opin­ion. Let’s say a hypo­thet­i­cal music store offers FLAC con­tent for the already deter­mined $1.25 per track, but also offers the same music in three grades of MP3. The top grade would be 320kbps con­stant bitrate, gen­er­ally regarded as “archival qual­ity” for MP3 and nearly indis­tin­guish­able from the source or loss­less copies. A full album at this bitrate takes up around 175MB. The mid­dle grade would be a vari­able bitrate copy aver­ag­ing around 190kbps. A full album would be around 100MB, though it can fluc­tu­ate depend­ing on how com­plex the source mate­r­ial is. This qual­ity is still con­sid­ered to be good enough and again would be hard to tell from the source on mid-to-low end audio equip­ment. The low­est grade would be around 115kbps, again vari­able bitrate, and while the qual­ity would be not­i­ca­bly lower than the source mate­r­ial it would be good enough for a portable player or low-grade audio equipment.

I’d price the high­est grade of MP3 some­where around $1.15 per track because it is hard to tell the dif­fer­ence in qual­ity. The mid­dle grade would land right at the cur­rent sweet spot of $1, and the low­est grade would be between 75 and 80 cents, if even that. It may be true what the record indus­try claims that prices can’t be low­ered much fur­ther than $1 for most tracks, but at least pop­u­lar ones where the ini­tial costs have already been cov­ered should offer this option.

DRM is another beast entirely, because there are so many vari­ables. Some, like iTunes, allow effec­tively infi­nite CD burn­ing but are locked in to either one or a small num­ber of portable play­ers. Oth­ers, like Microsoft PlaysFor­Sure, have a wide vari­ety of restric­tions which can be set lim­it­ing burn­ing, trans­fer to portable play­ers, and even num­ber of plays. The one thing that can be guar­an­teed is that any DRM locks out a por­tion of the poten­tial cus­tomers. Apple’s Fair­play only works with iTunes and the iPod, for exam­ple, while Microsoft’s PlaysFor­Sure only works on Win­dows PCs with Win­dows Media Player and locks out the most pop­u­lar portable player on the mar­ket. With either of those two choices, you’ve auto­mat­i­cally halved your mar­ket. With that in mind, it is my opin­ion that DRM should be lim­ited to all-you-can-eat sub­scrip­tion ser­vices like Nap­ster where the trade is made giv­ing up flex­i­bil­ity for unlim­ited access to a large col­lec­tion of music. For those who insist on using it on “pur­chased” media, I’d put the value at below 50% of the unen­cum­bered media, since at least half of the transferability/compatibility is lost.

When look­ing at this infor­ma­tion, it’s clear that EMI is mak­ing a step in the right direc­tion. Their higher qual­ity DRM-free offer­ings are still over­priced com­pared to CDs, but will be the best bang-for-the-buck in the big-label music down­load busi­ness for the near future. If the entire iTunes cat­a­log went DRM-free at the cur­rent prices and qual­ity, it would be right where I’d expect it to be given these numbers.

In con­clu­sion, the prob­lems of DRM seem to be finally catch­ing up to the music indus­try and things are begin­ning to change. It is my opin­ion that we’ll see prices com­pet­i­tive with CDs reach­ing online music stores very soon after the indus­try finally aban­dons their attempts to encrypt everything.

Com­ments and cor­rec­tions are wel­comed and encouraged.