Universal Music says no to iTunes - Price and DRM major issues

Universal Music Group will not renew its contract with iTunes according to The New York Times. Universal Music is the worlds largest music company. There appear to be two big issues in the negotiations; Apples insistence on the 99 cent price for all music tracks, and Apples refusal to license its proprietary DRM to other device manufacturers.

This is a very high stakes poker game. Apple's iTunes service would be seriously crippled without Universal's vast music library. However, iTunes brought in about 15 percent of Universal’s first quarter revenue, or about $200 million.

The New York Times reported that Sony/BMG, the second largest music company recently signed a one year deal with iTunes. The previous deals had been two year agreements. Universal is under a month to month agreement with iTunes that can be canceled at any time.

The music industry has a pretty bad record  in business negotiations.  Yesterday I reviewed the Rolling Stone magazine article "The Record Industry's Decline" which suggested that the record industry should have made a deal with Napster 7 years ago. They compounded the problem by first trying to build their own digital music services, then suing their customers for copyright infringement, then waiting 2 years before signing a deal with Apple iTunes.

Universal Music has a good point about music pricing. They believe that some new hit songs are worth more than 99 cents and some older songs could be worth less, or specially priced for a promotion. They want the ability to set prices for their own product. Wow, what a concept!

The DRM issue is more complicated. Apple refuses to license its proprietary DRM software to other device manufacturers. This DRM ties iTunes to the iPod creating a virtual monopoly. Apple argues that licensing the DRM to other manufacturers might result in someone hacking the code. The record companies argue that if Apples DRM was available on other devices it would create a bigger, more open, market for their music. It should be noted that Microsoft and other vendors license their DRM to other companies and there have been no instances of hacking or compromising the DRM code.

Competition and economic interests will drive the right answers. There is more competition for iTunes now than there was 2 years ago. The record labels have other options. But, Universal Music and the other labels need to consider how quickly they can replace the lost iTunes revenues. The playing field is leveled now to the point that the answers are not obvious. That is a good thing for consumers.

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Comments

[Adam]

Last I checked, Universal was more like a wholesaler than a retailer. What wholesalers get to set the prices that retailers charge for goods? (Pace recent supreme court decisions.)

[CoryS]

Adam, I was thinking the same thing and read this:

http://www.latimes.com/business/la-ex-prices28jun29,1,2736418.story?track=rss&ctrack=1&cset=true

Could Universal be getting ready to price-set its inventory for iTunes or walk if they don't? Let the fun begin.

[Mark]

"They want the ability to set prices for their own product" -- right! That's what they do with Didiom. Didiom allows them and other music providers to set their own retail prices.

[Marc Cohen]

This is much ado about nothing. The only price that will make a difference to consumers is free. Higher prices on popular songs will drive more people to file sharing. Apple and the record industry are fighting over pricing when they should be figuring out how to make money and make music free.

Check out the Ad-Supported Music Central blog:
http://ad-supported-music.blogspot.com/