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Universal Rejects Long-Term Apple iTunes Contract

The New York Times is reporting that Universal Music Group (owned by the French media giant Vivendi), the largest of the record companies, has refused to renew its two-year contract to sell downloadable music through Apple’s iTunes Store. Instead, Universal is opting for a month-by-month option that would enable it to jump ship with minimal notice to Apple, possibly signing an exclusive deal with another online music retailer.

The move is clearly a game of corporate chicken. Since tracks from Universal account for a third of all music sold in the United States, for the iTunes Store to lose access to such a massive library of music would be disastrous. However, nearly 15 percent of Universal’s worldwide revenue in the first quarter of 2007 came from online sources, and with the iTunes Store controlling over 75 percent of the online market, Universal stands to anger a retailer responsible for over 10 percent of its revenue.

Universal undoubtedly hopes to negotiate a more favorable contract with Apple, likely one that gives Universal more control over setting per-track pricing based on popularity or that involves Apple paying Universal a per-iPod royalty, much as Universal strong-armed Microsoft into doing with the Zune (see “Of the Zune, DRM, and Universal Music,” 2006-11-13).

I can’t see Universal pulling its tracks from the iTunes Store at this point for three reasons. Apple is now the third-largest music retailer behind only Wal-Mart and Best Buy, and the iTunes Store continues to grow. It makes no sense to endanger a relationship with a large retailer that stands to become even more powerful.

The popularity of iTunes stems in large part from the iPod, which has now sold over 100 million units and – bolstered by the release of the music-playing iPhone – shows no signs of losing momentum. Since nearly all other online music retailers employ Windows-based digital rights management that is incompatible with the iPod and the iPhone, no other online retailer stands much of a chance of competing with the iTunes Store in the near-term.

The final reason? Steve Jobs. The iPod, the iTunes Store, and the ethos of a flat-rate pricing scheme are near and dear to his heart, and any significant changes must be accompanied by some sort of gain, as with the EMI deal that resulted in more-expensive iTunes Plus tracks that lack DRM and are encoded at a higher quality (see “Apple and EMI Offer DRM-Free Music via iTunes,” 2007-04-02). Jobs simply wouldn’t let anything else happen.

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