Universal Dumps Apple iTunes

By Richard Menta 7/2/07

The major labels have had this love/hate relationship with Apple ever since iTunes first appeared. Because of its tight association with the iPod and a halo effect that stems as much from Mr. Jobs' persona as the parent company itself, iTunes was able to accomplish something the major labels had already failed at on several previous occasions - sell digital music files online.

At first the labels were pleasantly pleased with the results, but when they tried to tinker with a working formula by raising prices and extending restrictions on the use of the music they found that Apple was not going to let the upset the..er...apple cart.

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It also became clearer that Apple's strategy with iTunes was focused on selling not as much music as possible, but as many iPods. Last year when they demanded some changes Apple said no. When they threatened to pull their music from iTunes, which now had three-fourths of the paid download market, Jobs said go ahead.

Pulling out posed a serious problem, though. There was no guarantee that consumers would shift to other services like Rhapsody or Napster to get the music of Universal artists, because those services sell their tracks in a file format that is incompatible with the iPod.

With CD sales dropping sharply EMI, Warners, Universal and Sony Bertelsmann tout rising digital sales to the investment community to show growth and keep their stock prices propped up. It has been the only good news they have had lately and so ot was pushed hard. If a pull out of iTunes led to a downward instead of an upward spike in digital sales, the only growth the labels could show to Wall Street, who only care about growth, would be eliminated.

That's why the major labels blinked last summer and extended their iTunes contracts another year. This represented a significant loss of power over the recorded music industry as a whole and in the past year the label's feelings towards Apple have only soured further.

Now Universal Music group is again waving the sabres. Last week the company notified Apple that it will not renew its annual contract to sell music through iTunes. Instead the company said it will allow Apple to sell its music on a month-to-month basis with the possibility of pulling the plug altogether unless Apple comes to certain agreements on pricing and other terms.

You have to admit it is a gutsey move on the part of Universal's executives to win back some control from Apple. It also may be a career limiting move for those same executives. That's because the original problem for them is still there.

If Universal pulls out completely, people will still go on purchasing iPods. The recent hype over the new iPhone only validates that the consumer love affair with Apple shows no sign of abating. Furthermore, the new iPhone requires activation through iTunes so as Apple grows the market yet again so should iTunes revenue grow.

If Universal pulls out it will miss out on that potential revenue growth. Right now digital revenue accounts for 15% of the company's total revenue. With CD sales down 17% so far this year Wall Street is already bearish on the major labels. If Universal's digital sales plummet it will show in the stock price of parent company Vivendi.

That's why I think Universal will back down at some point.

Other MP3 stories:
iPhone Reselling, Why it Will Fail.
iPod Killers for Summer 2007
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