Vivendi's Universal Music Group has refused to renew its contract with Apple Inc. to sell its music catalog on the iTunes Store, according to anonymous inside sources. Apple spokesman Tom Neumayr disputed the reports that Universal had rebuffed the iTunes Store in any way. "We're still negotiating with Universal," Neumayr told Bloomberg.com. Hmmmm, what to make of that?
For that past couple of years, the Big Four music companies – Universal, EMI, Sony BMG and Warner – have watched uneasily as Apple became an increasingly powerful player in the world of digital music. The iTunes Store has about 75 percent of the market for online music downloads. It recently passed Amazon.com in a survey by NPD Group to become the third largest retailer of music in the United States, online or otherwise, with 10 percent of the total music market (Wal-Mart was first with 15.8 percent and Best Buy second with 13.8 percent. Fourth-place Amazon had 6.7 percent.)
Until now, Apple's strength has allowed it to dictate terms to the Big Four. But they haven't been happy partners. They wanted more control over pricing, particularly the ability to charge more for popular songs (iTunes charges 99 cents for each track). They wanted to be able to offer songs on other services without having to offer them on iTunes as well. They urged Apple to make its FairPlay Digital Rights Management available to makers of competing music players so iTunes songs would play on more devices (the DRM, an anti-piracy measure, prevents the songs from being played on unauthorized devices). They, along with other critics, claimed Apple had "locked in" iPod owners by selling them songs that would not play on other portable music players.
Though few consumers would shed a tear over the music companies' woes, one can see why they would want a more favorable deal. Big businesses like to be in control of how their products are marketed. And any musician signed to a major label will tell you that it's the record companies who prefer to do the dictating. While Apple's market dominance has been a formidable shield, it was unlikely that Steve Jobs could hold off the Big Four forever.
In a story on Business Week's Web site this morning, "sources close to Universal" said the new deal with Apple would be an "at-will" arrangement in which Universal would at least have the flexibility to make exclusive deals with other services, and possibly would even get the right to charge a limited-time premium for hot new hits. If this happens, no doubt the other three music companies eventually will want similar terms. Warner's deal with iTunes comes up for renewal in a few months (more fireworks?), but Sony has already agreed to a one-year deal, so they'd have to wait.
EMI, of course, went in an entirely different direction in May when they agreed to make their full catalog available DRM-free (and at a higher quality) for $1.29. That move negated the argument over "lock-in," since iTunes' AAC-encoded songs without DRM can in fact be played on rival devices, as long as AAC support is included on those devices. Current players that support the AAC format include the SanDisk Sansa, the Sony Walkman S Series and, if you can believe it, Microsoft's Zune. The AAC format, by the way, is not owned or controlled by Apple. Any manufacturer can include support for it on its player; any digital music vendor, such as Microsoft's Zune Marketplace and Amazon's download service expected to launch later this year can offer music in AAC format.
In any case, you won't see Universal's artists vanish from the iTunes Store any time soon, despite all the bluster. Universal, as the biggest of the Big Four, releases about a third of the music in the United States, but Apple has two-thirds of the digital music player market in addition to 75 percent of the digital download market. They clearly need each other. Anyway, if Universal did get the concessions mentioned in the Business Week piece, this battle's already over.
What does that mean for Apple and its place in the digital music business? It may not be all that bad. The realm of digital media is a rapidly changing one, and Apple will need to respond to these challenges as they come along. The deal with EMI to sell DRM-free songs was a win for Apple, and should pay dividends in future negotiations with the other three music companies when EMI's profits from iTunes increase. At the same time, the current flap with Universal will loosen Apple's grip on digital music. That will give a slight boost to Apple's competitors, both the digital music vendors and the makers of rival music players.
But Apple has nothing to fear as long as it keeps doing what got it into such a dominant position: making the best music players and operating the best music download service, anticipating and responding to customer desires. Increased competition isn't a problem as long as you're still better than they are.
