To License or Not to License, That is the Question

A recent article on CNN regarding Real’s reverse engineering of Apple’s FairPlay points out:

“Harmony (Real’s product) could help iPod sales,” says Charlie Wolf, an analyst with Needham & Co. “It could also take some sales away from the iTunes store, but it’s the iPod that makes the money.” “They need [an answer] that doesn’t sound anti-consumer and yet preserves the system they’ve built for themselves,” Bernoff says. “I can’t think of a response that satisfies both of those requirements.”

Well, I certainly I can.

1. Ignore Real.
2. Make FairPlay and the iTunes Music Store better.
3. License FairPlay.

Ignore them like the fly they are: small, but annoying. Apple needs to focus on making iTunes and the iPod better. As a result, FairPlay (and the iPod) will be updated and changed over the course of time. Since Real’s Harmony is essentially a reverse-engineered hack, it will break and songs purchased through Real will no longer work on iPods.

By licensing FairPlay to other parties, say in six months time, if Real decides to continue to provide music using their “hack”, they are the ones that will end up looking incredibly stupid and cheap for not licensing FairPlay from Apple. The iTunes music store has always been a loss-leader (or break-even leader) for Apple, and I agree that having a variety of ways to buy music for my Mac and iPod is a good thing. Apple is obviously aggressively expanding its iPod World Domination to phones and PCs, and a licensing/SDK could open up new distribution and revenue opportunities for Apple and others (such as buying and downloading songs via 3G or Wap portals on those fancy new Motorola phones from Orange, Vodafone, Verizon,etc.).

Apple legal is probably itching to deliver a cease and desist order, but I think that might backfire. By using this three-step plan Apple takes the moral high-road, increases the attractiveness of the iPod to customers, increases revenue and expands the iPod/iTunes ecosystem. It’s a clear winner for everyone but Real.

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