5 Comments

Summary:

By way of something like a follow up to Chris’s earlier post, some of you may have seen that Slashdot ran this story titled “iTunes Might Lose Labels” the other day. Sensationalist headlines (as far as the tech press goes) are, of course, the norm over […]

By way of something like a follow up to Chris’s earlier post, some of you may have seen that Slashdot ran this story titled “iTunes Might Lose Labels” the other day. Sensationalist headlines (as far as the tech press goes) are, of course, the norm over there, but is there anything in it, and what does it all mean?

According to the linked-to article in the New York Times, the contracts Apple has with the various record companies for the USA iTMS are due for renewal in the early part of next year and Jobs, the article would like to suggest, is preparing for something of an onslaught. Sony BMG, you see, wants to hike prices.

This much we already knew. There have been murmurings that the big labels have not been happy with Apple’s “low” prices for quite some while. But how far would they go to raise prices? Being difficult at renegotiation time is one thing, but is it really plausible that they would refuse to renew the agreements they have with Apple, thus requiring Apple to remove those songs from iTMS?

I would instinctively say no. iTMS has gone from strength to strength since its launch in the USA at the end of April 2003. Just over two years later, with a presence in 19 countries, the half-a-billion songs milestone was reached, and it just keeps on going. iTMS must be making not a small amount of money for Apple, but more significantly, a boatload of cash for the record companies.

And best of all, they don’t have to do anything. There’s no manufacturing, no distribution, no shop staff to pay. Granted there are bandwidth costs, but bandwidth is cheap compared to pressing CDs, printing sleeves, shipping them off and selling them. iTMS should be a music industry wet dream.

And ostensibly, it is. Before iTMS, the legit online music distribution world was barren and desolate. Pirates roved the virtual high seas of the Internet and all around the world people made copies of the RIAA companies’ prized catalogues with impunity. And whilst it would be errant hyperbole for me to suggest that iTMS has vanquished the evil pirate and made good, pay-per-download citizens of us all, it is not unfair to say that it has created a not insignificant revenue stream where there was not one before.

And money talks. As Apple concludes agreements in more and more countries around the world (and now that it is available in Japan, there are few other countries where it can make a significant impact), its power increases. Although downloading only currently accounts for a small proportion of record company revenue, this figure is only going to increase, and assuming that iTMS maintains at least most of its massive market share, the power will be with Apple.

Of course it is this, rather than Apple’s pricing, which is the crux of the issue. It has a sizeable market in its army of iPod users, and if the rumoured – and I use this naming grudgingly – iPhone does finally emerge, then in time, a whole legion more. It is perhaps not totally implausible to suggest that Apple could in fact bypass the labels totally, establishing its own record company which could sign artists for exclusive release on iTMS. The only issue there would be its spat in the UK with Apple Records.

But hold on a minute. One must not allow oneself to get carried away. Granted, iPod users are numerous, but truly ubiquitous they ain’t, and whilst Apple has no need to be seriously worried yet, there are signs that the iPod is nearing some form of saturation point. They can only lower their prices so much, and there are only so many people enticed by the simplicity and minimalist design. Apple’s marketing department is a force to be reckoned with, but it has its limits. And the news that iTMS Japan opened without a distribution deal reached with Sony was interesting – if not surprising – news. Given that iTMS Japan sold a million tracks in just four days, it appears that, at least in Japan, Sony is prepared to put some form of principle – that of not selling songs on a competitor’s online music shop, one supposes – before profit. Of course, in Japan, Sony is pushing its own music download service, which is far more expensive and – unsurprisingly – only works with Sony or a few Sony-compatible devices.

The New York Times’ article notes that Apple will also have to deal with the prospect of mobile phone companies selling music – there are far more mobile phones than iPods, and so users may in time shift to using these devices to acquire such content. It will be interesting to see if Apple’s doubtless superior user experience will help to retain customers and whether, in fact, customers actually want an integrated does-everything device. One response is, of course, the rumoured iTunes phone, which we may see an announcement on shortly, but there is some talk that carriers are not too willing to sell a phone which will monopolise prospective content revenue. We shall have to wait and see, as, one supposes, will the labels.

It’s hard to see where Sony BMG will go next. On the one hand, money is money, and shareholders are going to want a good reason for a company to fail to renegotiate a contract thus nullifying an existing revenue stream. On the other hand, this may be their last chance to do something before Apple gets too powerful.

I’m counting on the former – that a mixture of greed and pragmatism will drive them to accept the current situation, with the hope that their next saviour will arrive in the form of mobile phone companies selling music. If Apple gets a hold on that market too, things could well become interesting. We might even see the downfall of these relics of the 20th century.

And that would be the greatest service to music anyone could do.

By Gareth Potter

You're subscribed! If you like, you can update your settings

Related stories

  1. Ok well if they don’t re-negotiate their contracts would this be the beginning of the fall of apple since it seems that a huge part of their revenue comes from ipods and the music store? Would ipod sales go down and thus putting Apple back in the dark hole it was in not to short of a time ago? What would bail at apple this time?

    If you would like to talk more about this…email me at goodleads@gmail.com or I have yet to use google talk I wouldn’t mine trying that out either….

    Share
  2. Gareth: very thought-provoking analysis.

    Nick: I remain mindful of the fact that iTunes + iPod were an already-successful music platform before Apple started music online. If Apple fails to renew its contracts with the record labels, once-convereted, now-angered music fans would likely have plenty of incentives to happily resume illegally obtaining and sharing MP3 files.

    iPods do play all music formats, and iTunes is second to none, on either Mac or PC, when it comes to conveniently manage all that music. Remember the old Apple Slogans “Rip. Mix. Burn”. They remain valid.

    Further, the last thing the RIAA needs is for another “Napster-Kid” to write a very nice “plug-in” for iTunes that further facilitates illegal music sharing. We’ve seen a couple of those emerge in the past, leveraging Rendez-Vous technology, turning iTunes’ “streaming the neighbor’s music” concept into “downloading their tunes”.

    From what I remember reading in the past, selling songs off of its store isn’t that much of a moneymaker for Apple, in light of the razor-thin margins they’re operating on with the RIAA, and the bandwidth and computing resource costs of day-to-day operations of the online store. Sheer volume may have changed that math though.

    I thought Apple mainly benefited from sales of iPod devices (or whatever they come-up with next), and their slowly becoming a household name.

    There are good chances the music industry has more to lose from failed negotiations than Apple does.

    Share
  3. Nick,

    I have to agree with Chris here and think it is Apple that is in a position of strength here. It is certainly true that if people cannot procure a track legally, they will just download it.

    This is certainly the case currently for more specialised music, e.g. that issued only in the Japanese market. In Britain (where we pay $16-$30 for a CD anyway), Japanese import CDs can often cost $40-$50. A gratis MP3 download is thus the obvious choice for all but the most dedicated of collectors.

    The iPod/iTunes platform is a powerful one indeed. It is, however, crucial that Apple establishes itself in some way in the forthcoming mobile market – either through the rumoured iTunes phone or through licensing the FairPlay DRM. In the long run, I think the latter would make far more sense, because even if your pretty-on-the-outside-but-oh-so-ugly-on-the-inside Motorola phone plays FairPlay files, the beauty/simplicity of the iPod will sell for a fair old while yet.

    Share
  4. I guess before getting too worked up, we should wait for the event on Sept 7th to see what Steve has up his sleeves

    what if they’re going live with a Movie store along the same lines as teh iTMS and at the same time launching a video iPod and a set top box

    It’s about time they made more of the Mac being a home entertainment centre right at the heart of the digital hub

    If the iTMS business model expands, maybe Apple have greater leverage with the big record companies who become less important as suppliers as they are only supplying music.

    Furthermore it is an established fact that the iPod is capable of playing music from other services only apple doesn’t allow it – they may decide that increasing sales of iPods at the expense of the iTMS being the only supplier of music for iPods is a an acceptable compromise if the record companies don’t pay ball

    Share
  5. I didn’t know the contracts were up for renewal so soon. Time for Apple need to excite once more.

    Strategically Apple is at a crossroads… they now exist in an environment where their brand could happily house consumer electronics, software, content interfaces and content itself. Few brands can do that. And they ‘get’ the digital domain. The emerging medium of the future. As a consultant for Sony told me recently, Apple are out Sony-ing Sony right now. Even though they’re small (still only 6m ipods wordwide) they’re seen as an emerging threat in the content & electronics industry.

    Core to this is iTMS. It will evolve into a distribution channel for many types of content to many consumer touchpoints. So Apple needs the labels on their side right now to ensure iTMS dominance but then again the lables would be foolish to piss of Apple if their distribution strategy takes off. It absolutley makes sense that Apple eventually launch their own production facilities – music label, movies (Pixar) – using product launches to promote emerging talent (as they do now) but own the talent, promote and distibute the talent. It’s the SONY model.

    I imagine the announcement next week will go someway to re-enforcing this vision to the public, shareholders and competition. A range of portable entertainement/communication devices would make perfect sense. iTMS in the palm of your hand 24/7 anyone?

    Share

Comments have been disabled for this post