Universal iTunes Dispute Spotlights Better Ways To Sell Online Music - InformationWeek

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7/2/2007
08:46 PM
Alexander Wolfe
Alexander Wolfe
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Universal iTunes Dispute Spotlights Better Ways To Sell Online Music

It's shaping up as a good news, bad news kind of week for Steve Jobs. On the plus side, he's launched the most popular modestly featured smartphone ever. (I can't say I was surprised that the iPhone we were ogling at my office today feels heavier than my trusty BlackBerry.) In contrast, it couldn't have come as good news that the world's biggest record company, which has been selling its songs through the only online music store that matters, finally told Jobs to take the metaphorical gun away f

It's shaping up as a good news, bad news kind of week for Steve Jobs. On the plus side, he's launched the most popular modestly featured smartphone ever. (I can't say I was surprised that the iPhone we were ogling at my office today feels heavier than my trusty BlackBerry.) In contrast, it couldn't have come as good news that the world's biggest record company, which has been selling its songs through the only online music store that matters, finally told Jobs to take the metaphorical gun away from its head.The decision by Vivendi's Universal Music Group, which told Apple it won't renew its annual contract with iTunes and could begin selling at least some of its songs elsewhere, represents a huge financial risk. According to The New York Times, Universal pulls in more than $200 million annually through iTunes.

Which begs the question: Why would Universal snub Steve Jobs, when it could end up doing very serious damage to its own immediate bottom line?

The answer, clearly, is that Universal has read the writing on the wall, and it doesn't look good. Many of the news stories on the Universal-Apple fracas speculate that Universal is annoyed at Apple's enforcement of its one-price-fits-all, 99-cents-for-every-song policy. (Shouldn't it be 50 cents for the songs of a certain rap artist?)

This doesn't stick in just Universal's craw. The Times' story reprised a recent quote from Warner Music chairman Edgar Bronfman, who said: "We believe that not every song, not every artist, not every album, is created equal."

It's certainly true that some artists and their albums are more equal than others. That's why The Beatles and Led Zeppelin have never offered their respective catalogs online. The better to force consumers to buy high-value music by the album, rather than leave revenue on the table selling singles. (For example, many would buy "Help"; few "Act Naturally.")

There's more behind Universal's move than simply the desire to command more than 99 cents per song for its top acts, like U2 and the aforementioned 50 Cent. What's bothering Universal, and its competitors, is that they've lost control of the music business. In telling Steve Jobs to take a hike-an act that is seemingly one of cutting off one's nose to spite one's face-a company like Universal is in fact trying to plant some sort of stake in the ground through which it can regain control.

Consider that, while Universal may be making $200 million in iTunes sales annually, it's losing much more to online piracy. As we all know, most people fill their iPods with illicit tunes.

That's why it's always been clear to me that the iTunes sales model favors Jobs but not the record company. For the latter, the subscription-service model of Rhapsody, Yahoo, and Microsoft (URGE and Zune) is the way to maintain corporate self-interest. Why would consumers need to steal, whey it only costs $15 a month to listen to as many songs as you want to and to be able to download them onto your MP3 player?

I've been a happy URGE user for six months; my daughter and I both listen to whatever we want on our Samsung YP-Z5s. As well, the subscription services are compatible with Bronfman's idea of extra bucks for hot content. URGE routinely holds back the hottest stuff from the included downloads, offering it only for 99-cent purchase. However, because they do this judiciously, I've never felt like I'm being gamed. Imagine that-an e-commerce situation where both seller and consumer are treated fairly.

While I believe subscription services will be a key component of any solution to the record companies' online problems, they're not a panacea.

As Linspire chairman and MP3.com founder Michael Robertson told me last week:

Record labels have a real fear that the whole world will go open format, and with it, they will lose enormous control of various channels that they sell through. ... This is the dilemma the record companies have, because they don't want to do anything that increases the deterioration of the CD. A decade from now, the music industry is going to be much more diverse than it is today. Today it's CDs, 85% of revenue, everything else, 15%. ... Ten years from now, no one contributor is going to make up more than 20% to 25% of their revenue. Whether it's subscription, physical retail, a la carte digital sales, or hybrids like [Robertson's company] AnywhereCD.com.

Long term, Robertson believes something called a "music locker" will rise in prominence. A music locker is essentially an MP3 equivalent of e-mail. All your music is stored online, on the servers of the music-locker company, and your songs are accessible everywhere. This model will gain traction, Robertson believes, as we start to own multiple devices on which we play music.

His theory is that people won't want to manage (or have to repurchase) music to play on their MP3 player, phone, car, and -- he really said this -- bike helmet. All your music will be accessible to any of these devices, at any time, via your locker through the miracle of Wi-Fi.

It's a great idea, though it seems like it's sure to throw another monkey wrench in any nascent control Universal will regain by telling Steve Jobs where to get off.

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