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Real Networks announcement of its new Harmony Technology, which allows music files to be played on more than 70 MP3 players, including Apple's (Nasdaq: AAPL) iPod, may be the first salvo in the digital rights management (DRM) wars.
A live test of Harmony Technology is slated for tomorrow at the Jupiter Plugin Conference in New York City. The company then also will release a beta of Real Player 10.5 with Harmony Technology support.
Real's other music property, Rhapsody, is slated to deliver Harmony Technology later this year to its 550,000 subscribers.
Apple utilizes the Advanced Audio Coding (AAC), which is an open standard, but wraps its own FairPlay DRM around it so it can be used only on the iPod. Real Networks CEO Rob Glaser said he approached Apple about licensing to enable music purchased from its RealPlayer Music Store but received no response.
Creative Strategies senior analyst Tim Bajarin said he believes this is a critical play for Real Networks survival.
"If they can survive the legal challenges that are sure to arise from this, they could profit from bridging the gap of interoperability between the two dominant formats, Apple and Microsoft (Nasdaq: MSFT), to media devices," Bajarin said.
Test of Two Business Models
Today's digital music offerings come in many shapes and sizes, including a la carte buying, like Apple's iTunes Music Store (iTMS), where consumers pay 99 cents per song and on average $9.99 per album. Subscription based streaming is offered at Rhapsody, where users must be connected to the Internet to listen to music at a cost of $10 per month. Those who wish to use songs offline pay an additional 79 cents per song.
Phil Leigh, president of Inside Digital Media, suggested this is only the first inning in the game of digital media and that it is too early to guess where the market is going.
"The market is so young, there will be substantial evolutions in these services before we start to see where stores and formats are headed," Leigh said.
Format Wars
Balkanization of formats is not going to fly, Leigh contends. A common standard just like in the offline world of buying CD's will be required, he said.
"In the offline world, people go to record stores and buy a CD and it works in any CD player, regardless of where they bought it," Leigh said. "This is really how it will need to work universally in the digital world as well."
Leigh also cautions that this is a story Apple knows well, having tried this once before.
"Apple tried this with computers early on, and while they did have substantial share at one time, they were reduced to a niche player. The question to ask is, will this happen to them again?" He added. Bajarin expressed concern about the impact on consumers from the DRM battles among technology providers.
"I have great concern [that] over the next three to five years that DRM tied to specific platforms could slow the adoption rate of next generation digital media," Bajarin said.
Apple as a Monopolist?
Urs Gasser, a research fellow at the Berkman Center for Internet and Society at Harvard Law School, recently coauthored a case study on Apple's iTunes and how copyright, contract and technology are shaping the business of digital media.
In the study, he wrote, "Apple's Online Music Store, iTunes, takes advantage of its DRM system, FairPlay, and legal provisions such as those set forth in the DMCA (the federal Digital Millennium Copyright Act) to prevent music piracy on one hand, and to limit interoperability -- thus controlling the secondary markets -- on the other hand."
Bajarin and Leigh see this as Apple's strategy, with the company on record stating the iTMS was not expected to be a profit engine, while driving iPod adoption will impact Apple's bottom line.
"For example, Hollywood is lining up behind Microsoft's Windows Media platform, even with their dislike of the company," Bajarin said. "And [Apple CEO] Steve Jobs is beating the bushes to maintain leadership in digital media in Hollywood and drive adoption of its platform," he said.
For his part, Leigh sees Apple as encouraging licensing of the iTMS engine, like its deal 
with Hewlett-Packard (NYSE: HPQ) to go online this fall selling music and iPods under the HP brand, rather than ever giving up DRM access to the iPod from competing online music stores.
"Steve Jobs wants to guarantee the user experience of the iPod to his consumers, and he cannot do so if music from non-iTunes stores is ported to the iPod," Leigh said. "The iPod changes the way people listen to music, and I would guess he wants to maintain control of that experience," he said.
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