Yesterday Canadian online music store Puretracks.com made the bold announcement that they would begin to sell a large selection of songs as unprotected MP3 files, that they have become the first online store to remove the Digital Rights Management scheme from their product. It’s a move that comes right after Apple CEO Steve Jobs’ open letter to the industry to do just that, and so places the Canadian music industry in the role of being pioneers in this space. Immediately after the announcement, I sat down with Puretracks Inc. President and CEO Alistair Mitchell for an in-depth interview to discuss what has become a very complex issue. He discusses the reasons behind this major change, why Canadian indie labels and not the majors are involved, and reveals plans for Puretracks to begin selling videos online.

Kris Abel – What is Digital Rights Management (DRM)?

Alistair Mitchell – Wow, you start with a doozy. Really, it’s a technology that allows for, and there’s various technologies at play here, the playback of music or the burning of music, or playback otherwise quite frankly, it could include other media –video, etc., but basically it is permission-based technology that allows for the media files to be played by the content owner and are interacted typically between the consumer’s PC or device and the media servers that are providing that content.

Now different companies use Digital Rights Management in different ways. How has PureTracks used it? What restrictions have been in play with a song when purchased from your store?

Well, let me prefix this by saying that Puretracks adopts the, like any retailer if you will we are taking product from a producer, in this case it’s the record companies, and part of that of course is the artists themselves, they are the ones creating the product. On part of the product they are deciding, of course how the music will sound like, and they are also deciding how the packaging will work, and they are also deciding under what conditions they will be played and used.

So they provide us the product and they provide us the licensing terms that they would like to ascribe to that particular media. So the licensing wrap that we apply there is not sort of by design a Puretracks, we don’t determine the content permissions for each file, the owner does.

To date what we’ve done, we’ve used a Windows Media Format which also has the capability to enable Windows Media DRM and we’ve done that, to date anyway, all across our catalog, indies and majors alike, and some labels allow different permissions relating to the license, but in all cases there is a license of some sort. When we deliver the media file to the music fan, it comes with the license and the license has certain instructions that will allow for it to be played a certain amount of times, burned so many times, and imported to “X” amount of devices.

To date we’ve been using that technology across our entire catalog. Today we’ve changed that.

So if I buy a song with DRM on it from Puretracks, there are going to be restrictions, perhaps the number of times that song can be played, but also the kind of devices I can play it on?

Well, it’s not a restriction on the number of devices you can play it, the restriction is…certain devices support certain DRMs. So that really resides more on the manufacturers’ side in terms of whether it’s a Samsung device it will have certain DRM capabilities versus an iPod for example versus a Sony device. Device manufacturers will also play a part here in determining, if you will, what kind of receiver device has capability on the DRM.So our DRM, up to date, has been on the Windows Media format and that media format plays on all “PlaysForSure” devices which includes a large number of devices found at any major retailer these days.

And that list does not include the iPod, correct?

Correct and vice versa. iTunes songs that are purchased can only be played on an iPod. So their DRM is only capable of being used on that device.

What brought on the need for DRM software? Was it concerns over piracy, concerns over copyright infringement?

There are probably a bunch of reasons, I’m not the content owner. It’s probably best to ask them directly. Common sense tells us, when we first launched into this endeavor some three, four, five years ago now, we were in the Wild West if you will of digital delivery and a lot was going on with respect to peer-to-peer and with respect to piracy, so content owners were trying to get a grasp on how to build a business model in that environment. There are some that would say “Just plant down and do nothing in the online space” and there were others that said “We must make something happen in this space” and along came Puretracks and others like us who got licensing, which was a breakthrough both for major record companies and for indies, to do what we did. And I think they did that, knowing that they had some technology in the marketplace that would allow them to enable the file for people purchasing the track and not for people who are pirating them

Would it have been possible to have launched Puretracks as an online store without DRM? Was that ever an option?

Excellent question. Y’know, I’ve heard some questions today around the likes of “How much has DRM hampered the growth of digital music?” Well, that’s the kind of question, y’know, “How long’s a piece of string?”, it’s a very difficult type of question to answer and the answer is very hypothetical. And I could build an argument that it has hampered it, but I could equally build an argument that none of these companies would have gone to market as quickly as they did. Okay, they would have likely gone to market at some point, maybe, but we all launched in 2003, so it would have taken how many more years before we would have launched? Arguably to date we still have DRM on the majority of our tracks, so no one would have launched.

So you would not have been able to launch in 2003 if it wasn’t something that you applied?

I don’t think so, that was a key enabler for us to get into the marketplace. And I think that’s a very important point. That as much as we are very pleased to be creating choice for consumers, and proving choice for our record labels frankly, to be able to enable their files without DRM, that DRM is not the bad guy here.

No, of course not.

DRM is an enabler and it can be used by companies like Puretracks to enable certain business models that are very unique and without it we wouldn’t be able to launch certain subscription-based services for example. So it’s important to not make it the bad person.

Oh no

Acknowledge that it has a purpose and a place and in some cases labels will say that it has a place in the a la carte download business, in other cases as today is demonstrating, there’s considerable momentum for providing an a la carte file for download without the license or permission structure around it.

Well that leads us to “What has changed?” The motivations for using DRM is still around, for labels that have insisted on its use because of copyright infringement, because of piracy, piracy’s still around, what has changed to make labels reconsider even using DRM?

Well, let me give you one, sort of, major example. We’ve been operating on a Windows Media Format, we’ve been doing that since 2003, and there’s been a wide selection of devices that support that Windows Media Format, produced by various types of manufacturers, and there’s also been the iPod. And there was the Sony device. The iPod has done tremendously well, Windows Media devices are out there a plenty, but services based on that platform have done a smaller share of the market and Sony arguably a smaller piece than. Now enter stage left Zune which is a Microsoft device that is not using their own Windows Media DRM platform. It is introducing a whole ecosystem. So now we have a growing collection of devices that do not have interoperability capabilities and so, if you will, a growing demand from music fans to break through that. If in any given household there are three different devices that support three different DRMs, they clearly would like to be able to play their files on any one of those devices. So I think that’s been a strong enabler for us, in terms of enabling record companies if they want to make sure that their songs play anywhere. When you buy a CD, you know that you can sit in the car or take it home and play it in the home stereo, you can put it in your computer, put it in your child’s CD player, if they still have one, so it’s a given, you know that you it can play anywhere. You need the same kind of ubiquity of the file playback to be able to have the best market, I think.

What is the difference between a song that you can buy from Puretacks today, one of the songs that does not have DRM on it, and the kind of song files you can find on a peer-to-peer network such as KaZaa or Bit Torrent? What distinguishes the two now if there’s no Digital Rights Management?

Well, it’s a file that is a) 192k quality file, absolutely no virus concerns that come with it and its delivered through a service that makes it easier, and frankly it’s a file that consumers are ready to embrace, that they realize that there are content producers, artists, that are behind these songs that make a living from it, and they don’t want to – basically they don’t steal books so why should they steal music?

Good points, but just to clarify, with a DRM-enabled song from Puretracks there would be restrictions from me taking a song from Puretracks and just copying it and handing it off to a friend, with the new files that you are launching, those restrictions are not in place, so in theory it is now possible to use your product and make pirated copies? Is that true?

That’s true, but it’s always been true if you will. You had permission yesterday without service, before we launched, to download a .WMA file from us and based on the permissions on the file, to burn it to a CD. The moment it’s burned to a CD, it’s an open file format. So if you will, it’s a speed bump. If someone wants to do it, if there’s a will there’s a way. It’s not an iron clad protection against piracy. Piracy is piracy as far as I’m concerned and we don’t condone it and license-holders don’t condone it, and I think generally society doesn’t condone the notion that we’d walk into Indigo and pilfer a book. So yes, it’s possible, one can do that, and regrettably some people do do that, but just because its possible doesn’t necessarily mean that people will do it, and from our experience, we’ve done business since 2003, we’ve grown a very large consumer base and they’re regular customers, and they come to us for service, the quality of our catalog and everything I’ve said applies. They could do any number of things with the files and typically they’re respecting the file and we are saying that we respect our customers and we trust our customers and we want to make sure, to the extent that license-holders want to do it, not all might, that we’re there to enable it for those license-holders moving forward.

You mentioned the license-holders, obviously this is a change that is not effecting your entire catalog, it’s only effecting certain labels. Can you tell me about the music labels that have chosen this route?

Currently we’re launching with 50,000 tracks. We’re launching tracks from Nettwerk, a major indie label in this country, we’re launching with Sonic Onion, we’re launching with Beggar’s, we’re launching with IODA which is a major aggregator, we’re launching with AudioGram which is a premiere label in the Quebec marketplace and frankly across this country. So in total 50,000 tracks with some very top line performers including the Sarah McLauchlins of the world, the Barenaked Ladies and I could go on. And that’s not all we are targeting something shy of a million files to be enabled in an MP3 format by the end of this year so that when people are cracking open their new player in the holiday season of ‘07, those players from manufacturers X, Y, or Z with different DRM capabilities will all play the files which are sold from Puretracks.

Absent from that list are the big labels, Sony BMG, Universal, etc. Why aren’t they participating?

Well, I guess that will be conjecture. I would say they have – I guess their current policy remains in place, We’re responding to those labels that have – you know there’s been a kind of, I would call it an evolving discussion with our license holders and we have active discussions with all labels, but in this case of course, the growing crescendo of the conversation is with our indie partners and once it got to critical mass for us, we said “Okay, it’s now time for us to respond to the needs of these rights holders and enable that capability for them” and to the extent that major labels may or may not want us to enable that capability for them, MP3 file format, time will tell. To date I think their policy is quite clear and I think, as far as we’re concerned, going to adhere to that policy.

Have they shown an interest in removing DRM? Is there going to be on-going discussions with yourself and the big labels about this?

Well, I think, the preverbal kitchen table for an evolving marketplace such as the one we’re in, y’know it’s five years young and things are still being learned. Discussions are happening everywhere on, y’know, “How do we further the cause”. There’s always a growing marketplace for digital music, but how do we make it more robust. I think those discussions are happening, at various kitchen tables and conference tables, and no doubt those are happening at major labels as well. There’s nothing concrete that I can share with you in regards to Puretracks and the majors.

We’ve talked so far about just music files. Will we see Puretracks evolve into handling music videos, TV shows, or movies the way that iTunes has?

Absolutely, we will be launching music videos very shortly, certainly within ’07 so delivering that kind of capability is a given. To the extent that we will be growing out our catalog to support other types of content beyond music? Those discussions are in an early stage there are a lot of complexities around the licensing there, in terms of the producers and broadcasters involved in legacy and new content, so I wouldn’t say that that is on the imminent horizon, but the platform we have built out and the capability we have for digital media will apply equally to video. And an important point to make is we do power the back end for all the major telcos in this country, Bell Canada, Telus, Sat-tel, and Aliant. We also power the back end for the Best Buy online store, CHUM, Astral, so it’s important that we’re there for them to be able to provide the right type of content and that they seek new types of content, in the extent that involves TV, we’d like to be there for it.