MESSAGE
| DATE | 2005-08-29 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [NYLXS - HANGOUT] Steve Jobs and the RIAAA
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August 27, 2005
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."
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