Why Apple doesn't need Universal Music

iTunes logoThe New York Times is reporting that Vivendi-owned Universal Music Group has decided against renewing its licensing deal with Apple’s iTunes. Instead, Universal will license its music to Apple “at will”, meaning that the company can remove its songs from the iTunes store at short notice, which it hopes will put the company in a stronger position when negotiating pricing and other terms in the future.

The reason for the stand off is fairly well documented. Universal, along with the other majors, is frustrated at Apple’s insistence on fixed pricing and its refusal to allow other download services and music player manufacturers to utilize the company’s copy-protection technology, FairPlay. The latter means that music bought from iTunes only works on the iPod, and no other service can sell DRM’ed downloads that will work with Apple’s music player. As a result, says Universal, Apple has become too powerful a player in the music industry.

Will such strong-arm tactics help Universal? I’m not convinced Apple needs Universal as much as Universal needs Apple.

Sure, were Universal’s catalog — which includes artists such as U2, Akon and Amy Winehouse — to disapear from iTunes, it would be a blow to Apple and would make its music store that bit less compelling. But the media and customer backlash against Universal would be massive: “here those greedy record companies go again”. And besides, if users can’t buy Universal music for their iPods from iTunes, then they’ll either purchase on CD and rip it, or more likely, download it illegally elsewhere. Remember, on average, music bought from iTunes only accounts for 3% of songs on every user’s iPod. Either way, it won’t impact on iPod sales, which is where Apple makes most of its music-driven revenue, anyway.

So how can Universal weaken the iTunes/iPod hegemony? Simple. Start offering DRM-free downloads, as EMI has done, which can be played on an iPod (or any digital music player) and can be sold by other online servicesnot just iTunes. This would create a much more level playing field, with greater competition in terms of pricing and other factors (such as backup/storage and audio quality). But then again, it’s real competition that the majors probably fear the most.

last100 is edited by Steve O'Hear. Aside from founding last100, Steve is co-founder and CEO of Beepl and a freelance journalist who has written for numerous publications, including TechCrunch, The Guardian, ZDNet, ReadWriteWeb and Macworld, and also wrote and directed the Silicon Valley documentary, In Search of the Valley. See his full profile and disclosure of his industry affiliations.

29 Responses to “Why Apple doesn't need Universal Music”

  1. Kate says:

    I totally agree. Apple and iTunes may be unfairly dominating the market, but the products are great and incredibly popular. It’s one of the only services that actually competes with pirated music, which is pretty impressive considering that it’s not free. As you said, this really wont affect Apple, but it’s a bad move for Universal.

  2. Noah Everett says:

    Universal is just trying to throw its weight around. In the end Apple holds the cards. So yeah…I agree.

  3. Jeff says:

    Apple holds almost no cards. The majority of people still don’t even use digital music players yet (the CD and for the audiophile the Super Audio CD are were the majority of music collectors still are).

  4. Steve O'Hear says:

    @Jeff

    Everybody I know has an iPod, even my Dad :)

  5. Jeff says:

    What is that supposed to mean? People that individual associates with do not make up a mean within a collective. Here is an example. The majority of everyone I know has a graduate degree and makes at least six figures. Is this typical?

  6. Ross says:

    “Apple holds almost no cards. The majority of people still don’t even use digital music players yet (the CD and for the audiophile the Super Audio CD are were the majority of music collectors still are).”

    Apple holds ALL the cards, and is busy creating cards that didn’t exist and stealing ones from other companies. Sure, the audiophile market hasn’t switched to DAPs yet, but 100 million iPods have been sold, and in the last year I’ve only seen 1 person with an audio player on the subway that wasn’t a DAP, and that was a walkman! Combined with the fact that the sentance “The majority of people still don’t even use digital music players yet” is the stupidest thing i ever heard. What majority? What people? when is “yet”? If you mean the majority of westerners, than your blatently wrong. Plus the comment in brackets is the most incoherant… This is stupid, im just getting angrier and angrier. Lets just leave it at that.

  7. Jeff says:

    I don’t give a damn how it makes you feel. Incoherent, really? The majority of sales in the music industry are still made through audio-CD sales. Second, the majority of individuals still don’t own a digital audio player because of cost ($249 to $349) for a disk based player is still a lot of cash for some.

    Here are 2006 figures. Yes, they are somewhat dated, however, it list only 28% of Americans as owning a digital audio player. Further, this does not mean that all individuals within these demographics will have “so-called” high-end audio players like the ipod or Zune.

    http://www.macnn.com/articles/06/07/13/women.spark.digital.music/
    http://www.itfacts.biz/index.php?id=P6940

    Again, you are not taking into consideration the dynamics of the American population.

  8. Jeff says:

    I don’t give a damn how it makes you feel. Incoherent, really? The majority of sales in the music industry are still made through audio-CD sales. Second, the high end market of audiophiles has begun to transition to SACD and DVD-Audio. Finally, the majority of individuals still don’t own a digital audio player because of cost ($249 to $349) for a disk based player is still a lot of cash for some.

    Again, you are not taking into consideration the dynamics of the American population.
    Here are 2006 figures. Yes, they are somewhat dated, however, it list only 28% of Americans as owning a digital audio player. Further, this does not mean that all individuals within these demographics will have “so-called” high-end audio players like the ipod or Zune.

    http://www.macnn.com/articles/06/07/13/women.spark.digital.music/
    http://www.itfacts.biz/index.php?id=P6940

  9. Brian says:

    Jeff,

    People who cite statistics often times forget to look at actual real-world data all around them. Instead of looking at some internet site that might skew it’s data one way or another – because that’s NEVER happened before – how about you go to a popular park on a good day and sit and watch all the people walking by. DAP’s are everywhere, and most of those have the tell-tale white headphones of the iPod.

    I know audiophiles that insist on records as opposed to CD’s. They all own iPods as well. It’s the way of the future when it comes to a mobile music library.. I’ll take what I see out in the real world any day over a statistic. At least the real world is verifiable by everyday people and not just a statistician. But I’ll go out on a limb and thank you for finding that most people don’t have DAP’s. That way when Apple drops Universal on their @ss it won’t have any discernible effect on us. This way, we both win.

  10. Jason says:

    Check these statistics:
    http://www.guideline.com/pdf/Guideline%20Tech_MP3MarketProfile.pdf

    “A survey by the Pew Internet and American Life Project also notes that 22 million people, ONE IN TEN, own an iPod or MP3 player. … While ONE OUT OF FIVE people in the U.S. under the age of 30 have digital music players.”

    The under 30 demographic is pretty important to big business (especially to a company who’s artists include Akon, Amy Winehouse, etc…). If 1/5 of that group, and 1/10 of the country has a DAP; then I’d say digital audio should be pretty important to record companies. Seeing as how Apple’s iTunes Music Store is tops for selling digital audio, I’d say they pretty much have the ball in their court, cards in their hands, whatever metaphor you see fit

  11. Bryan says:

    I think that it is unfair of Universal to demand that Apple license FairPlay. Universal wants it licensed to everyone, but an agreement with Apple states that they have a VERY short time to fix any cracks in FairPlay’s DRM or else all music can be pulled. The reason Apple doesn’t have to fix it more often is the fact that Apple is so tight with it’s secrets. Where FairPlay to be licensed, secrets would be way more likely to seep out.

    Big labels can’t have it both ways no matter how much they complain.

  12. Matt says:

    Jeff, let’s drop any discussion of devices, players, etc. for a second.

    Apple is the *third* largest seller of music period. Not online, not digital. Third largest. Within striking distance of both Best Buy and Wal-Mart.

    And they have *no cards*? You can’t have seriously meant that, right?

  13. Steve says:

    Jeff is not in touch with reality.

  14. Nick says:

    I think you give the consumer too much credit, Steve. The RIAA has been suing people with little public outcry outside of techies and music nerds, what makes you think there would be a sizeable backlash from Universal pulling out of iTunes?

  15. I did the maths on the stats provided in the NYT article, and found that iTunes alone contributes about 11-12% of Universal Musics’ Quarterly Revenue.

    Note that it’s not digital music sales in general, just sales from the iTune store.

    Also note that it’s not 12% of Universal’s digital music sales, it’s 12% of their entire revenue each quarter.

    Anyone else think Universal giving up 12% of its revenue is a bit nuts?

  16. CJ says:

    @Kate
    “Apple and iTunes may be unfairly dominating the market, but the products are great and incredibly popular.”

    Apple and iTunes are not unfairly dominating the market. They are simply dominating teh market. And they are doing it for the exact reasons you mentioned… great products and popularity. What exactly is unfair?

    While I hate DRM as much as everyone else, iTunes gives a very easy to use (and relatively easy to get around DRM) product. And now with DRM-free music with higher quality (albeit with higher prices), they give consumers a prduct they are willing to buy, rather than go download off p2p sites.

    That said, almost all of my music is ripped from CDs, but the iTunes Plus store has been getting a little more of my money.

  17. Jim says:

    You’re all douches. Content is king. If Universal were to actually pull their catalog and stick with it, iTunes would slowly lose their dominating position. People buy music, regardless of where from, because they want a certain album or track. If iTunes stops carrying what they want (yes, Universal holds most of the popular content), then people would find other outlets (other online vendors, physical cds, or p2p sites), period. The only question is whether or not Universal would be willing to take a short term hit by pulling their catalog from Apple. I doubt they would be.

  18. Kfir says:

    Jeff
    I can see what you are saying. However the statistics have one problem. It takes the total number of people.
    What you want to look at is how many people that are actually consumers of universal music own an iPod.
    Im sure there are quite a few people in that statistic that are just not into universal’s music (or any music for that matter).
    I know that when i look around me, going by train for 30 min then subway for another 30 I see a lot of iPods. In fact i cant remember the last time i saw a non iPod mobile music player. It is true I am limited to city demographics, but I believe that is also the main demographics for CD buyers.

  19. Though Apple doesn’t need Universal and it sparked an interesting debate, people have been misinformed and thus the hype has too.

    Universal will continue to sell its music on iTunes, but will not agree to the license which basically restricted them, for example any music they offered elsewhere had to be offered on iTunes.

    The media has been very misleading on this situation and Universal and Apple are in talks anyway, nothing is final.

  20. buddhistMonkey says:

    Were Universal to pull out of the iTunes Store, it might have some short-term negatives for Apple. But in the long run, Apple is going to win this one, and Universal is going to lose if it chooses to fight.

    The crux of the matter is, Universal is fighting to protect a music catalog crippled with DRM. They’re trying to force Apple to license its DRM, while Apple would prefer to get out of the copy-protection business altogether. Most consumers side with Apple on this issue.

    Personally, I only recently started buying music from the iTunes Store, when they announced their deal with EMI Music. I’ve only purchased DRM-free iTunes Plus tracks and albums, which at the moment excludes Universal. The only copy-protected music I own I got as free Singles of the Week.

    iTunes Plus is the future, while DRM-crippled music like Universal’s catalog is the past, and Apple knows it. As an anecdotal example of WHY they know it, sales of Pink Floyd’s “The Dark Side of the Moon” have increased 350% since they started offering it DRM-free.

    Universal obviously hasn’t gotten the message yet, but they will soon enough. Once they see EMI’s profits increasing while theirs are decreasing, they’ll end up dropping the DRM and coming back to the iTunes Store with their tails between their legs. Then Apple will be in an even stronger position than they are right now.

    And right now, they’re the No. 3 biggest seller of music in the country. Apple is holding four kings, while Universal is looking to go all-in with a pair of Jacks and a flush draw. My advice to Universal is to suck it up and fold the hand. And if they’re going to be long-term winners, they’re going to need to open up their catalog to iTunes Plus.

  21. hurtle says:

    Jeff opined thusly:
    “the high end market of audiophiles has begun to transition to SACD and DVD-Audio.”

    Jeff, it is apparent to everyone, (except perhaps you) that next gen audio formats will not take off, SACD and DVD-Audio have been around for years now and nobody is buying.

    For most people, CD quality is the high end, I’ve given up on trying to persuuade people that lossles formats are the way ahead, they just don’t care and can’t hear the difference through their iPod earbuds.

    Convenience is king, personally I love vinyl and valves, but even I have packed away my hi fi and records. I have around 15,000 tracks in my iTunes library which I listen to via a firewire audio interface (with nice sounding DACs) and and a pair of audiphile quality powered speakers.

    My .002 Euros

  22. John Scott says:

    Universal needs to sell music to make money! iTunes last I heard was the third largest retailer of music! Maybe Universal wants to sell it’s music other places but as far as leaving Apple iTunes it will not happen. Even if DRM goes by by the iTunes software is now the choice of millions and has been for a while. I do not see this changing anytime soon. I would like to see iTunes begin to offer discount pricing on older material and new bands. I agree with Universal that they should have some say in pricing their media.
    In the end Apple is doing just fine with the iPod and now with the iPhone they will continue to corner the market for personal players. Sorry Zune (Microsoft).

  23. Michael Pate says:

    Universal has had a false sense of entitlement ever since last fall when Microsoft agreed to pay them One dollar per Zune. My bet is they are still hoping for a similar offer from Apple. When they don’t get it, their bluff will be called and they will fall back in line.

  24. Joey says:

    Unless Universial pulls out of ITunes and offers DRM-free music somewhere else. Then this is going to be a stupid move for them. I don’t mind purchasing music with DRM, 90% of my music library is from ITMS, however I would not purchase DRM music from anyone but ITMS, and I think other people like me would think the same. I hate CD’s now, so I wouldn’t be buying thoses, however I like Universial artists, so that would leave one choice…. I think the ball is in Apples court.

  25. Kate says:

    @CJ

    I said “MAY be unfairly dominating the market” as a concession to Steve’s use of the phrase “the iTunes/iPod hegemony” in the post. I did not assert that it was unfair, only conceding that some view it as such. I agree with you, that the words hegemony and domination may be too strong, as the Apple share of the market is only online. And, as I said in my original comment, I agree that Apple’s great move was creating a service so easy to use that it competes with free p2p sites.

  26. Apple doesn’t need Universal? Sorry, but iTunes is only as good as what it distributes, and Universal is the #1 global music content provider.

    This is a bad deal for both parties in the short term, but rest assured that Universal knows something we don’t. Keep in mind that, soon, Amazon will be selling DRM-free on a scale that blows iTunes out of the water.

    The record giants and iTunes are completely under-serving the long tail. They think they’re at war with the Internet, but they’re really at war with bad marketing.

  27. Paul says:

    The best thing is not to buy Universal Music products. Don’t buy the songs from them and send a message to Universal that we the consumer won’t tolerate their behaviour.

    I plan to avoid buying any music from Universal for a year. Neither will I steal.

  28. Mike says:

    Hey Steve, this is a great article and absolutely spot on. We are a 3 person, 7 (seven!) iPod household, and there is NOTHING which will make us switch to any other music player, that much is for sure. The last reason would be “some greedy record company” as you put it. If I can’t get it from them, I simply get it from somewhere else.

  29. Michelle says:

    I will not give my credit card to another site. It’s iTunes only for music purchases. If Universal wants to pull their music from iTunes, it’s their loss. People will steal more of it.

    iTunes is the only music service that has been highly successful getting people to buy digital music when they could otherwise steal it. I teach teenagers and college students. They steal most of their music and see nothing wrong with doing so, but when they do buy, it’s from iTunes only.

    Universal should give up and just offer their content DRM free at iTunes to capture the business of those of us who want higher quality DRM-Free music but want to stick to the best online music store there is.