Universal Upsets the Apple Cart

The New York Times reported on July 2 that Universal Music Group notified Apple that it will not renew its annual contract to sell music through the iTunes Store, choosing instead to sell music to Apple "at will," meaning it could withdraw its wares with little notice. Executives of both companies declined to comment.

In one corner: UMG/Vivendi, the world's largest music company, said by Billboard to sell one out of every three new CDs sold. In the other corner: Apple's iTunes store, now reckoned to be the third largest music retailer in the US, responsible for a 15% market share.

Universal, like the other Big Four labels, doesn't like Apple's power in what it sees as its market. In addition to selling 15% of the music sold, Apple owns the download market with a 76% share. Apple has also refused to license its Fairplay copy-protection system, which would not only allow other download sites to market to the world's 100 million iPod owners, but would also make it possible for other devices to download from iTunes. What may well stick most in UMG's craw, however, is Apple's insistence on the 99¢ flat-price sales model.

Apple's Steve Jobs defends the 99¢ per song flat price as consistent, affordable, and inviting to new customers, encouraging sales rather than piracy. iTunes recently initiated DRM-free 256kbps downloads from EMI at a higher price, and Jobs has been publicly urging the other members of the Big Four to join EMI in that endeavor. The record labels dislike the flat-price model—possibly even more than they fear removing DRM from downloads. Warner Music Group CEO Edgar Bronfman, Jr. told a stockholders meeting recently that "not every song is worth the same price," a comment that we expect was not intended to begin a digital fire sale.

Does this mean Universal is likely to pull its catalog out of the iTunes store in the immediate future? Probably not. It may deeply resent Apple's gatekeeper role in the music business and may chafe under its terms, but where's it going to go? Record stores are an endangered species these days—over 800 closed in 2006—and the new postal rates on large packages are driving up shipping costs for mail-order giants like Amazon. Wal-Mart and BestBuy, the largest and second-largest music retailers, only stock the best-selling current releases. Cutting Apple off from UMG's offerings would put a dent in Universal's annual sales on the order of about $800 million (an estimate, since UMG does not break down the iTunes store's share of its sales, but for Q1 2007, 15% would be $200 million).

There's another factor to consider: the immense power of Steve Jobs. Although there's been a spate of Chuck Norris–style "Facts", Jobs is a force to be reckoned with, especially in the ever-shrinking music market.

Ironically, the iTunes song model might actually be partially responsible for the recording industry's shrinking profits. CD unit sales are dropping—they plummeted 20% in 2006—and while, according to Nielsen SoundScan, individual song sales have risen 54% so far in 2007, the two numbers don't balance. Selling albums is obviously more profitable than selling single songs.

It's hard to blame Apple for that, however. The company did not create the current music scene, which is constructed around hits to such an extent that the other songs on albums are seen by many consumers as so much inferior filler. Why buy the filler when you can cherry-pick? On the other hand, blaming Apple is probably a lot easier than releasing albums people actually want to buy.

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