Media Wonk

Universal, iTunes try a new routine - July 2, 2007

Anytime Apple Inc. is involved in a story there is a tendency to see it in cosmic turns.

So it’s been so far with today’s reports that Universal Music Group has declined to renew its blanket licensing agreement with iTunes: “Apple Faces Rebellion over iTunes,” the Seattle Post Intelligencer bannered. “Big  Trouble for iTunes,” ABC News blared. “Universal Plays iTunes Hardball with Apple,” is how ZDNet played it.

In reality, not so much.

First off, tensions arise between vendors and retailers all the time in consumer-goods businesses. The fact that Universal would be looking to gain some leverage with a dominant retailer is both unremarkable and appropriate.

The labels made a bad deal with Apple the first time around and have lived to regret it. It’s perfectly natural that Universal would be looking to level the playing field.

The steps it’s taken so far are not even that extreme.

Back when VHS rentals ruled the home video market, and Blockbuster Video ruled the rental market, the studios made a series of revenue-sharing deals with the retailer—essentially long-term licensing agreements--that they quickly came to regret. With its dominant and growing market share, Blockbuster could more or less dictate the terms of the revenue split, effectively giving it control over the studios’ margins—a situation no vendor wants to be in with respect to a retailer.

To break Blockbuster’s hold over their margins, the studios had to resort to an entirely new format—the DVD—which had cost characteristics that allowed movies to be priced for purchase, at places like Wal-Mart, Best Buy and Target, rather than rented at Blockbuster. Only then were the studios able to reclaim some pricing power.

Universal isn’t proposing anything that radical. It hasn’t threatened to pull its catalog from iTunes, and it certainly isn’t proposing a new format. So far at least, it’s simply refused to sign a long-term licensing agreement of the sort that Apple has used to dictate pricing in the music download market, according to the reports.

Consumers aren’t likely to notice any changes. Universal will continue to make its catalog and new releases available to Apple on a month-to-month basis, but can pull individual titles from iTunes on short notice. That will give the label the flexibility to offer certain titles at higher prices through other online retailers and force Apple to either take the deal at the higher price or pass on the title.

It also buys more time for Universal to assess the impact of going DRM-free, a provision Apple was pushing hard for in the negotiations. EMI saw an initial spike in sales when it made the switch to selling DRM-free tracks through iTunes, but its not clear yet whether that effect will have legs. Universal seems content to let EMI continue in the role of guinea pig.

The tug-of-war between Universal and Apple over such ordinary business issues as pricing, terms and conditions is actually a healthy sign for the digital music business.

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