More on iTunes Troubles

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.

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