SHADMIA'S WORLD

Just Another Guy with Opinions

iTunes Under Pressure

Posted by shadmia on September 3, 2007

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Apple’s iTunes is the undisputed leader in downloaded digital music with a whopping 76% market share. It is also #3 in overall music sales behind Walmart and Best Buy, having recently surpassed Amazon.com. It has sold more than 100 million iPods, which is the only device that works with iTunes, and has refused to allow other music players access to the iTunes music library. No other company has more influence over the delivery of digital music than Apple.

In order to sell music Apple has contracts with all the major music companies like Universal, Sony, Warner and EMI. Because of its dominance Apple has been able to make deals with these companies setting the price of digital downloads at 99 cents per copy. Many of its suppliers would like to see a flexible price structure that charges more for new releases and less for older songs. Apple has resisted this, claiming more complex pricing would discourage customers from purchasing music online and increase the temptation to look for free pirated (illegal) music. Now as some of these contracts come up for renewal there seems to be a reluctance to just do as Apple says.

Universal, the world’s biggest music corporation, has announced that it will not renew its contract with Apple to sell its music through the iTunes music store. Instead, Universal said that it would market music to Apple at will, a move that could allow Universal to remove its songs from the iTunes service on short notice if the two sides do not agree on pricing or other terms in the future. This may just be posturing by Universal in an attempt to pressure Apple into making concessions or Universal may decide to look elsewhere to distribute its music. Apple however does have a deal with EMI to sell music without copy protection for a slightly higher price of $1.29.

Apple not only sells music online but it has a significant offering of video content as well. In a move that seemed to echo the actions of Universal, NBC also announced that it too will not be renewing its contract with Apple. NBC is the biggest provider of digital video content on iTunes, accounting for about 40% of all downloads. It offers popular shows like Battlestar Galactica, The Office and Heroes. In all, NBC offers some 1,500 hours of news, sports and entertainment programming and earns about $200 million a year from digital downloads through iTunes. Without a new contract Apple will no longer be providing these programs after the end of the year. As with its digital music Apple offers a simple pricing structure for video content. Episodes of television shows sell for $1.99, with movies priced at $9.99. NBC, like Universal, would also like to move to variable pricing which Apple has resisted.

In a move seen as challenging iTunes dominance, Universal has recently announced that it will sell online music without copy protection through existing digital music retail services like RealNetworks and Wal-Mart, nascent services from Amazon.com and Google, but not through iTunes. NBC has also announced Hulu.com, a venture in partnership with the News Corporation to build a video portal to compete with YouTube and presumably iTunes as well.

The big question is whether iTunes’ virtual monopoly on digital downloads can be broken. It certainly seems improbable that Apple’s current dominance in the market, through its sales of iPods, can be sustained over time. Apple is not a content provider, it only provides a medium for companies like Universal and NBC to sell its products. If the providers choose to leave Apple and provide their content elsewhere, where does that leave Apple? So far the contracts with Apple have been financially rewarding but as new technologies emerge and new alliances are formed, there is no guarantee that the status quo will be maintained.

 

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