[Infowarrior] - Universal in Dispute With Apple Over iTunes

[Richard Forno]

July 2, 2007
Universal in Dispute With Apple Over iTunes
By JEFF LEEDS
http://www.nytimes.com/2007/07/02/business/media/02universal.html?ei=5065&en
=1b940de192f6dfd7&ex=1184040000&partner=MYWAY&pagewanted=print

Steven P. Jobs, the co-founder and chief executive of Apple, is an emerging
force in the mobile phone business, thanks to the snaking lines of gadget
fans who queued up last week to buy the iPhone. But now he faces a headache
in an industry Apple already dominates ‹ digital music.

The Universal Music Group of Vivendi, the world¹s biggest music corporation,
last week notified Apple that it will not renew its annual contract to sell
music through iTunes, according to executives briefed on the issue who asked
for anonymity because negotiations between the companies are confidential.

Instead, Universal said that it would market music to Apple at will, a move
that could allow Universal to remove its songs from the iTunes service on
short notice if the two sides do not agree on pricing or other terms in the
future, these executives said.

Universal¹s roster of artists includes stars like U2, Akon and Amy
Winehouse.

Representatives for Universal and Apple declined to comment. The move, which
comes after a standoff in negotiations, is likely to be regarded in the
music industry as a boiling over of the long-simmering tensions between Mr.
Jobs and the major record labels.

With the shift, Universal appears to be aiming to regain a bit of leverage ‹
although at the risk of provoking a showdown with Mr. Jobs.

In the four years since iTunes popularized the sale of music online, many in
the music business have become discouraged by what they consider to be the
near-monopoly that Mr. Jobs has held in the digital sector ‹ the one part of
the music business that is showing significant growth. In particular, Mr.
Jobs¹s stance on song pricing and the iPod¹s lack of compatibility with
music services other than iTunes have become points of contention.

By refusing to enter a long-term deal, Universal may continue to press for
more favorable terms from Apple or even explore deals to sell its catalog
exclusively through other channels. If Universal were to pull its catalog
from iTunes, Mr. Jobs would lose access to record labels that collectively
account for one out of every three new releases sold in the United States,
according to Nielsen SoundScan data.

But if Apple were to decide not to carry Universal¹s recordings, the music
company would likely sustain a serious blow: sales of digital music through
iTunes and other sources accounted for more than 15 percent of Universal¹s
worldwide revenue in the first quarter, or more than $200 million. (Vivendi
does not break out revenue from Apple alone).

If push came to shove and Universal decided to remove its catalog from
iTunes, it might not necessarily instigate a broader insurrection against
Apple. The second-biggest corporation, Sony BMG Music Entertainment,
recently decided to sign a new one-year contract making its catalog
available to iTunes, according to executives briefed on the deal. A
spokeswoman for the company, a joint venture of Sony and Bertelsmann,
declined to comment.

Some industry observers have cautioned against taking on Mr. Jobs directly.
³When your customers are iPod addicts, who are you striking back against?,²
said Ken Hertz, an entertainment lawyer who represents artists like Beyoncé
and the Black Eyed Peas. ³The record companies now have to figure out how to
stimulate competition without alienating Steve Jobs, and they need to do
that while Steve Jobs still has an incentive to keep them at the table.²

But other music industry executives say the major labels must take a harder
line with Apple at some point if they are to recalibrate the relationship.
In particular, they say, it is unfair for Mr. Jobs to exert tight control
over prices and other terms while profiting from the iPod. Mr. Jobs, in
February, noted that less than 3 percent of the music on the average iPod
was bought from iTunes, leading music executives to speculate that the
devices in many instances are used to store pirated songs. (Of course, users
can also fill their players with songs copied from their own CD
collections.)

Apple has now sold more than 100 million iPods, and the device¹s ties to
iTunes have helped make Apple the leading seller of digital music by a wide
margin. The iTunes service accounts for 76 percent of digital music sales,
and the contract talks come as it is on the rise ‹ Apple recently surpassed
Amazon.com to become the third-biggest seller of music over all, behind
Wal-Mart and Best Buy, according to data from the market research firm NPD.

All of that has transformed Apple into a prominent gatekeeper, wielding
influence as a tastemaker by highlighting selected artists on iTunes
storefront, and as an architect of the underlying business dynamics.

Apple has stuck to a pricing system that charges a flat 99 cents for a song
since iTunes started four years ago (except for the recent introduction of
songs without copy protection, which carry a higher price). Mr. Jobs has
long argued that a uniform system and low prices will invite new consumers
and reduce piracy.

But some music executives have been chafing at the flat rate that Apple has
insisted upon in its contracts with the big record labels, and they have
been pressing publicly or privately for the right to charge Apple more for
popular songs to capitalize on demand or, in the event of special
promotions, to charge less. Edgar Bronfman Jr., the chairman of Warner Music
Group, reinforced that idea at a recent investor conference, saying ³we
believe that not every song, not every artist, not every album, is created
equal.²

In the backdrop of the pricing dispute is an investigation by European
regulators who are studying the roles of the music companies and Apple in
setting prices in certain international markets.

At the same time, Mr. Jobs has refused the industry¹s calls for Apple to
license its proprietary copy restriction software to other manufacturers.
Music executives want the software to be shared so that services other than
iTunes can sell music that can be played on the iPod, and so that other
devices can play songs bought from iTunes.

Mr. Jobs has argued that sharing the software with other companies would
increase the likelihood that its protections would be cracked by hackers,
among other problems. Instead, he asked the music companies to drop their
insistence on copy protection altogether. So far, only one of the four music
companies, EMI, has made a deal to sell unrestricted music through iTunes.