The most wildly successful on-line music business model that actually works and they are going to fuck it up.
Apple, Digital Music's Angel, Earns Record Industry's Scorn
By JEFF LEEDS
Two and a half years after the music business lined up behind the chief executive of Apple, Steven P. Jobs, and hailed him and his iTunes music service for breathing life into music sales, the industry's allegiance to Mr. Jobs has eroded sharply.
Mr. Jobs is now girding for a showdown with at least two of the four major record companies over the price of songs on the iTunes service.
If he loses, the one-price model that iTunes has adopted - 99 cents to download any song - could be replaced with a more complex structure that prices songs by popularity. A hot new single, for example, could sell for $1.49, while a golden oldie could go for substantially less than 99 cents.
Music executives who support Mr. Jobs say the higher prices could backfire, sending iTunes' customers in search of songs on free, unauthorized file-swapping networks.
Signs of conflict over pricing issues are increasingly apparent. This month, Apple started its iTunes service in Japan without songs from the two major companies - Sony BMG Music Entertainment and Warner Music Group - leaving artists like Avril Lavigne, Beyoncé and Rob Thomas out of the catalog because the companies refused to license their music to iTunes, executives involved in the talks said.
That gap in the Japanese music market, the world's second biggest, is considered a harbinger of what may await American consumers as the contracts that record companies have with Apple in the United States come up for renewal early next year.
Mr. Jobs in the past has cast himself as an innovator battling established media giants like Disney and Microsoft. But these days, allies and adversaries both agree, he has more power online than Wal-Mart has in the bricks-and-mortar world.
Apple commands an estimated 75 percent of digital music sales, and roughly 80 percent of sales of MP3 players, with its market-leading iPod. While many still admire Mr. Jobs's touch - iTunes quickly established a market for paid downloads after the industry wasted years on misfires - he also inspires enmity or jealousy from others in the industry, which is back in a slump after a modest rebound last year.
Mr. Jobs' vision of simple, uniform pricing for songs and a policy of limiting Apple's music to Apple's devices are increasingly under attack.
"He'd like to continue to define the rules of the game," said Paul Vidich, a special adviser to America Online and former executive vice president of the Warner Music Group. Mr. Vidich said the digital music market, while growing, was still a fraction of the music business, but added, "I just think the music companies are now at a point where there's too much money on the table not to insist" that Apple accept variable prices.
"The question is," Mr. Vidich said, "what do they want the profile of the business to look like going forward?"
A sore point for some music executives is the fact that Apple generates much more money selling iPod players than it does as a digital music retailer, leading to complaints that Mr. Jobs is profiting more from tracks downloaded to fill the 21 million iPods sold so far than are the labels that produced the recordings.
Andrew Lack, the chief executive of Sony BMG, discussed the state of the overall digital market at a media and technology conference three months ago and said that Mr. Jobs "has got two revenue streams: one from our music and one from the sale of his iPods."
"I've got one revenue stream," Mr. Lack said, joking that it would require a medical professional to locate. "It's not pretty."
In a more conciliatory statement yesterday, Mr. Lack said: "I look forward to sitting down with Steve in the fall when we are scheduled to discuss Apple and Sony BMG's relations going forward. I think Steve has done a great job on behalf of the industry and in the months ahead we have lots of challenges to conquer together."
Apple has long allowed different prices for full albums sold on the service, though it believes that maintaining the 99-cent price for each song on an album acts as a natural cap. The service, which is available to consumers who download iTunes software to their computers, allows users to choose from roughly 1.5 million songs from major and independent labels. The songs, once paid for and downloaded, can be transferred to an iPod device, burned to blank discs, or played on the computer. At the price of 99 cents a song, the share of the major labels is about 70 cents.
Some analysts suggest that the willingness of the music companies to gamble on a new pricing structure reflects a short memory.
"As I recall, three years ago these guys were wandering around with their hands out looking for someone to save them," said Mike McGuire, an analyst at Gartner G2. "It'd be rather silly to try to destabilize him because iTunes is one of the few bright spots in the industry right now. He's got something that's working."
The push for variable pricing is not uniform across the business. The Universal Music Group, a unit of Vivendi Universal and the industry's biggest company, appears to support Mr. Jobs's desire to maintain the price of 99 cents a track for the time being. The EMI Group, the British music giant, has expressed a desire for more variation in prices but does not appear interested in a protracted fight.
The divide among the four record companies reflects a broader philosophical argument about whether the fast-expanding digital market is stable enough to bear a mix of prices, particularly a higher top end, while millions of consumers still trade music free on unauthorized file-swapping networks.
"I don't think it's time yet," said Jimmy Iovine, the chairman of Interscope Records, Universal's biggest division. "We need to convert a lot more people to the habit of buying music online. I don't think a way to convert more people is to raise the price.
"I believe that he really feels that everybody isn't hooked yet into the whole concept," Mr. Iovine said, referring to Mr. Jobs. "You make it affordable, at a reasonable price, so they can learn about it. It's not an unreasonable position."
The other main battleground in Apple's coming confrontation with the industry has to do with "interoperability" of services and devices. Mr. Jobs has so far refused to make the iTunes software compatible with music players from other manufacturers, and he has prevented the iPod from accepting music sold from competing services that use a Microsoft-designed music format. As a result, songs purchased from Napster, for example, will not play on an iPod.
Apple's critics say the strategy echoes the company's decision, in the early years of personal computers, not to license its Mac operating system software. Many computer industry analysts say that approach allowed the rival Windows system to establish itself, and consigned Apple to a far smaller share of the computer market.
Apple has said that it will benefit more from improving iTunes than from devoting resources to make it compatible with other, smaller systems.
Still, to some executives, that practice makes Mr. Jobs appear more concerned with maintaining market dominance for his high-margin iPods than with allowing a more open digital market. All of the music companies, to one degree or another, have been urging Mr. Jobs to abandon the strategy, according to executives involved in the talks.
Hilary Rosen, the former chairwoman of the Recording Industry Association of America, agrees on that point. "If Apple opened up their standards, they would sell more, not less," she said. "If they open it up to having more flexibility with the iPod, I think they'd sell more iPods. On the other hand, I don't think it's their fault that nobody else has come up with something great" to compete.
Sony BMG in particular has taken steps that may apply pressure to Mr. Jobs to make Apple's software compatible with that of other companies. The company has issued dozens of new titles - including high-profile CD's from the Dave Matthews Band and the Foo Fighters - with software to limit the number of copies that can be made from the disc.
The software is compatible with Microsoft's music software, but not Apple's, and as a result music from those Sony BMG albums cannot be transferred to iPods that are hooked up to Windows-based PC's. EMI has been test-marketing similar software with a handful of titles.
Even some music executives who favor altering the iTunes service doubt that they will be able to force Mr. Jobs' hand by withholding their music. Instead, they are counting the months until the major wireless phone carriers enter the business of selling songs to mobile phone customers. Since there are many more mobile phones in use than there are iPods, the industry thinking goes, the arrival of a broad mobile music market will erode the leverage Mr. Jobs now holds.
But Apple has also been working with Motorola to develop a phone that can import songs from an iTunes-equipped computer.
Mr. McGuire said Apple was not likely to quietly surrender its position in the market.
"I think if they're throwing down for a street fight," he said, "they may have picked somebody who's as good or better at it than they are."
What is this...PAY, that you speak of?
I didn't read the whole thing, but I think that the idea of paying more for a recently-released "hit" makes sense.
Do you think a teeneager will defer purchasing the latest Mandy Whatever hit because it's $0.50 more expensive.
The flip side here is that "oldies" will be cheaper. And oldier probably means anything older than a year.
i used to download all my music, but i've got too much to lose if they sue me. i went ahead and started buying my cd's again. i guess it's worth it to have higher quality tracks, and to not have the constant threat of prosecution lingering in the back of my mind...
edit: i looked at the stack of cd's sitting on my dresser... with the money i've spent on those things, i could've bought another AR
Agreed. It's the only upside.
Problem is that a lot of people will go P2P for the more expensive crap (and I do mean CRAP) and the labels can then say "Oh, we're losing billions to pirates" when it's their own stupidity about on-line distribution (and pushing shit as "popular entertainment") that is driving people away.
Having watched the RIAA and labels for years I can honestly believe this could be their strategy.
You can download , record from the radio - whatever. It's the actual Distribution that'll nail your ass.
It's like recording a television show - perfectly legal.
Go out on the street and give it away, or sell it - and you be in deep $#!t .
do either of y'all have a link supporting this? i've heard it before and kept sharing turned off on the p2p networks i was using, but i'm usually kind of skeptical when it comes to things like that.
if true, it would definately be nice. there are several groups that only have one or two good songs, and i'd rather not waste money buying entire cd's...
*edited- vb code is different here? oops, this isn't vb site, nevermind.*
allright, it looks like there's some truth to it...
Have you tried to buy a decent older album later? CDs for bands like Led Zepplin often sell at $5 to $10 more.
Those songs will fall into the $1.49 range. This is for music that paid for itself 30 years ago. It's simply a ploy to get more money for less effort. We're seeing a trend of good artist that publish themselves online now and cut out the record executives completely. I hope it continues and grows until the companies die.
Of course they are going to fuck it up. Despite all of the efforts to help them transition gracefully into the 21st century, the record companies have dug in their heels and will not let go of 1959.
Their business models have evaporated, they do not work well with the modern economy and technology. Yet they want to force it to work like it used to, they want to ignore all of the opportunities in front of them in favor of the opportunities they had 30 years before their current customers were born. they aren't willing to fit into the current market, they want to force the market to fit them.
If the Livery Owners Association of America had existed and used such 'business sense' in the early 1900s, they would have been complaining bitterly about fewer and fewer horses being boarded in their stables, and the dropping sales of horse shoes and nails. But they would have refused to turn their livery stables into parking garages for cars, because they always made money on the stables in the past, and that gives them the absolute right to continue making money forever, right?
Good luck to the record companies. Despite all of the legal challenges and hot air, the basic tenet of evolution and capitalism will win out. Adapt or die. And it is a glorious thing...
Doesn't affect me anyways, I download and share all I want, it is NOT illegal where I live so all the record companies can FOAD. Where do they get off selling CD's that have one, maybe two good songs and the rest are filler?
No wI Download all the songs from an Album, decided if I like it, then, and only then will I decide if I am going to actually buy it (almost never happens). Hell, more and more often I ma finding groupls where I only like one or two of their songs (exceptions like Toby Keith, Brooks and Dunn, Dierks Bentley)
ah well... apple sucks anyways, RIAA suckes immensely, I think they all need a good kick to the balls
The record companies are morons.
It could wind up being a business opportunity for Apple a ways down the road, though. Since Apple and iTunes have become a major distribution channel, that gives Apple the optioin of becoming a virtual recording label. What do recording labels do that adds value? they scout acts, promote them, and arrange the pressing and distribution of the physical artifacts, namely the CDs.
iTunes blows this business model out of the water. It costs Apple essentially zero to put a new act up on iTunes for download, and they don't have to distribute CDs or hold them in inventory. So Apple has the potential to simply tell artists "we'll give you 25-50 cents of every song sold from iTunes". That's way more than the artists get from the record labels. Apple doesn't even really have to scout acts--just put 'em all up for download, at least the ones that aren't obvious crap. The artists would have to take over promotion, but they can do that by touring, directly bribing radio DJs, and all the other time-tested ways to create hype. The artists could even retain rights to their music, as far as Apple is concerned. iTunes is mostly run as a zero profit activity by Apple--it's marketing infrastructure by Apple to sell iPods, which is where they make their real money. This model completely cuts the recording labels out of the loop.
This will of course piss off the record labels. Their major asset is their back catalog; everyone wants to be able to download David Lee Roth era Van Halen. If they punch out of iTunes it would be a major loss for iTunes, but it would also put them back to square one: clinging to an obsolete business model that has been overcome by technology.
Good lord, all this angst over friggin' MUSIC?!?!
It's doubly sad that the US used to actually I dunno...MAKE stuff..and all we do now is churn out 'entertainment' that supposedly appeals to someone....somewhere. I guess.