Behind the Apple vs Universal breakup
Taxing the hardware?
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Column Earlier this month, Universal Music Group (UMG) - the world's largest record company with acts like U2 and Jay-Z - decided not to renew its contract with Apple's iTunes music store. Universal will continue to supply iTunes its vast catalogue but may cancel that supply at any time. In the company's own words, "Universal Music Group will now market its music to iTunes in an 'at will' capacity, as it does with its other retail partners."
This marks the end of intense negotiations between the two companies. The previous three-year deal between them ended last year, and a temporary one-year agreement also expired.
This article focuses on the reasons for Universal's course of action - and its chances of gaining income from hardware manufacturers.
Breaking Away
For years the major labels have complained about iTunes' price fix of $0.99 per song. They have argued that new releases should be priced higher than the more obscure tracks from older catalogues. Although EMI and Apple entered into an agreement to release EMI tracks for $1.29 each, these records are not protected by DRM. Universal, along with Sony BMG and Warner, have steadfastly refused to release non-DRM protected tracks.
Another underlying tension is that Apple has made a huge amount of money from sales of iPods - far more than the labels have made from iTunes. As of April 2007, the iPod had sold over 100 million units worldwide. This makes iPod the best-selling digital audio player series in history.
Analyst estimates for iPhone sales in its first weekend ran as high as 700,000 units, beating many investors' expectations, and some expect the momentum to continue. The iTunes Store has sold over 2.5 billion songs since its inception four years ago, as well as 50 million TV shows and over 1.3 million movies, making it the world's most popular online music, TV, and movie store. But the labels only make 70c off each track. This revenue pales in comparison to the amount of money Apple generates from sales of such devices whose purpose, in full (the iPod) or in part (the iPhone) is to store and play these tracks. The money is in the hardware.
Late last year, Universal successfully negotiated with Microsoft a $1 royalty for each Zune MP3 player sold. Unfortunately for Universal, Zune has not done much business due to serious design flaws. Things would have been a bit different if they could get a dollar from every iPod and new iPhone, too.
Steve Jobs says it is Apple's goal to sell 10 million iPhones in 2008, the first full year of sales. This means that the goal is to get one per cent of the £1bn strong mobile phone market. If Universal could negotiate £1 from every unit Apple plans to sell, it'd make $10m.
It is very possible that Universal intends to use the new "at will" deal to exert pressure on Apple to either replace the 99c fixed price with variable pricing or to agree to pay Universal a royalty on iPods, or both. Or as just discussed, Universal may wish to extend the royalty to any new products that play music, such as the iPhone.
Apple wields the bigger stick
As discussed, iTunes sales are not hugely profitable for the labels. But music sales have probably been even less profitable for Apple. For each 99 cent download they keep only approximately 30 cents. And out of that they must pay for bandwidth, promotion, and transaction costs. Their profit is probably minimal - if they make anything at all.
Even Steve Jobs admits that the iPod is not successful because of iTunes. By his own admission, the average number of iTunes songs in every iPod is just several songs. People fill their iPods with copies of their CD collection or from trading with friends, or through P2P services such as LimeWire.
iPod's success does not depend on iTunes, but rather the elegance of iPod's design and ease of use. For these reasons, if Universal retreated from iTunes, no one can reasonably anticipate that it would seriously hurt sales of iPods or iPhones.
Next page: Good idea - bad execution
COMMENTS
I use my iPod for Podcasts
So tell me again why I should pay Universal to listen to science podcasts?
Anyway, it's bad public policy to levy the player as a proxy for music listening royalties.
Firstly, it is anti-competitive. Imagine how a new firm (such as Virgin Records once was) would ever appear in the future digital music market.
Secondly, it's far too complex. There are substantial differences in record company market share depending on where you are -- English speakers don't listen to many Japanese-language recordings, some English-language groups are unaccountably "big in Japan", dragging their record company's market share with them.
Thirdly, it prevents the evolution of the market. Flickr and YouTube don't make money by levying product. What makes digital music so special that it will always need the particular form of intermediatary known as a "record company"?
Fourthly, levying the iPod denies artists subsequent revenues. Music preferences change as people age. But the revenue via the hardware purchase will always be frozen to my preferences at the time I purchased the player. Since art follows money, those annoying boy bands so appealing to teenagers will exist forever.
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"Steve Jobs says it is Apple's goal to sell 10 million iPhones in 2008, the first full year of sales. This means that the goal is to get one per cent of the £1bn strong mobile phone market. If Universal could negotiate £1 from every unit Apple plans to sell, it'd make $10m."
Chuck in a pear of bananas and you've got yourself a meal!
This isn't 1985, you know.
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@Stu Reeves
Exactly, and I don't see why it makes my argument crap.
Quite the opposite, I fully agree with a levy for photographers, authors, graphic designers and all.
Note that, however, you got it completely and fully wrong.
"illegally reproduced" is absurd to use as a reply to my comments, since by definition, the levy needs to be a counterpart to it being LEGAL to reproduce.
Also, where did you ever see that it should be authors or graphic designers or whatever who get to raise a levy? Where did youi see me say that U2, Britney Spears and Korn should each raise a levy? You reply in bad faith I'm afraid.
What I do support (as well as so many theoretical articles if you read economic scientific paper) is a levy for the industry, so that there is a pool of revenue for the music industry to be shared among all artists (and if need be, the ones whom they work with/for).
I thank you for raising the subject, however badly: yes, indeed, such a levy should also be raised for the authors as a whole (the proceeds having then to be split among them by an organization, just like for the AHRA, how to rightly split the money being another issue down the line). At least the day when all the categories you cited will be concerned with widespread adoption of the marginal-cost tarification, which is not currently the case.
In the meantime, because there are no individuals actually BUYING nice pics (and professional wouldn't usually do it illegally), there is nothing to compensate, as there is no switch to a different business model for pictures. If some day there is and it's good for the society to allow photographs to live by paying them while allowing everyone access to everything rather than having to see just one or two pictures because you pay for each one, then fine, it'll be time to have a levy for them too.
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