February 25, 2018

Why Did Universal Threaten to Pull Out of iTunes?

Last week brought news that Universal Music, the world’s largest record company, was threatening to pull its music from Apple’s iTunes Music Store. Why would Universal do this?

The obvious answer is that the companies are renegotiating their contract and Universal wants to get the best deal they can. Threatening to walk is one way to pressure Apple.

But where digital music is concerned, there is no such thing as a simple negotiation anymore. For one thing, negotiations like this have political ramifications. The major record companies have managed, remarkably, to convince policymakers that protecting their profits should be a goal of public policy; so now any deal that affects the majors’ bottom lines must affect the policy process.

(As I’ve written before, copyright policy should be trying to foster the creation and distribution of varied, high-quality music – which is not the same as trying to ensure anyone’s profits.)

The political implications of Universal’s threat are pretty interesting. For years the major record companies have been arguing that the Internet is hurting them and that policymakers should therefore intervene to protect the majors’ business. iTunes’ success has supplied the major counterargument, suggesting that it’s possible to sell lots of music online.

Walking away from iTunes would cause a big political problem for Universal. How could Universal keep asking government to prop up its online business, when it was walking away from the biggest and most lucrative distribution channel for digital music?

And it’s not just Universal whose political pull would diminish. The other majors would suffer as well; so to the extent that the majors act as a cartel, there would have to be pressure on Universal not to pull out of iTunes.

Most likely, Universal was just bluffing and had no real plan to cut its iTunes ties. If this was a bluff, then it was most likely Apple who leaked the story, as a way of raising the stakes. Its bluff having failed, Universal is stuck doing business on Apple’s terms.

One can’t help wondering what the world would be like had the majors moved early and aggressively to build an online business that customers liked. Having failed to do so, they seem doomed to be followers rather than leaders.

Comments

  1. There is one interesting possibility that I haven’t yet seen posed: That the short term contract is a result of Apple pushing Universal rather than the converse.

    With the recent EMI higher quality / DRM free pilot program, it may be that apple wants to move more of their music to that model. If that is the goal, it makes sense for apple to deny long term contracts which do not include DRM free sales.

    While I don’t know the likelihood of this scenario, it seems plausible that the short term contract is a concession by Apple, since they couldn’t get Universal to budge on not offering DRM free music.

  2. Anonymous says:

    I’d love to see an article on this site that suggests ways to help support the growth of legitimate, DRM free, smaller label friendly audio downloads. Is buying iTunes plus music online a good idea to support this? Is buying music online in general a good idea?

  3. Universal never threatened to pull out of iTunes. The mainstream media got it wrong. Universal said they wouldn’t sign another 1 year contract with Apple which they didn’t. They were always going to keep their library on iTunes.

  4. If that was all bluff and Apple risked nothing, why do the new contract seems less interesting for Apple ?
    What do they gain from giving more freedom to Universal ? Apple doesn’t really make money on the store, supposedly, so why would they allow the bluff to break the “1$ per track” system and push prices higher ?

  5. David Robarts says:

    Basically Universal is reserving their right to leave iTunes whenever they want. They haven’t found a replacement, but prefer to keep that option as Apple is calling the shots on all the iTunes deals. As long as Universal wants to be able to put DRM music on iPods, they’re stuck (unless DVD Jon’s ventures to make FairPlay compatible devices and services work out – not likely as Apple will fill any gaps as quickly as possible). The only way Universal could make a power play is leaving Apple to release DRM free music elsewhere.

  6. Universal was never going to cut ties to Itunes. They have refused to provide Apple with guaranteed access to their entire catalog. This means they can cut deals with other services for individual tracks.

    I think the interesting question (and the real bluff) is how would apple respond if they try this. Would Apple pull down the entire Universal collection if Universal gave an exclusive for a hit song to a competing service? Would Apple’s anti-trust lawyers let them do it even if Steve Jobs wanted to? 🙂

    http://www.businessweek.com/technology/content/jul2007/tc2007072_140083.htm?chan=top+news_top+news+index_businessweek+exclusives has a good write up of the specifics of the dispute.

  7. One can’t help wondering what the world would be like had the majors moved early and aggressively to build an online business that customers liked.

    Indeed. I suspect it would have looked a lot like allofmp3.com, which is now defunct. But it did provide, for it’s short existence, demonstrattion of a viable online business plan. Not one the majoprs wanted to see, but, the fact that it did exist, and despite not being backed by any major players, managed to get the labels so angry they sued it for 1.65 trillion dollars…

  8. “As long as Universal wants to be able to put DRM music on iPods, they’re stuck (unless DVD Jon’s ventures to make FairPlay compatible devices and services work out – not likely as Apple will fill any gaps as quickly as possible)”

    It matters not. Even if DVD Jon manages to make FairPlay compatible devices and services, Universal is still stuck with iTunes Store. Remember that iPod commands a huge marketshare of DAP market. Unless UMG wants to forfeit a huge portion of a profitable business, they must cater to this market. The only way to do it is to go with DRM-less music, agree with Apple’s terms or try to find FairPlay compatible technologies. The first one is a no-go. Universal is enamored with DRM. The second one is what they choose to do though they go with short term contracts instead of a long term one. UMG could try working with DVD Jon, but FairPlay is Apple’s technology and they could change it at any time. Any devices and services using FairPlay compatible techs are at Apple’s mercy. They must deal with the customers every time Apple decides to upgrade something. That’s not a recipe for a good business. Like it or not, pulling out of iTunes Store hurts Universal much more than it hurts Apple.

  9. What I think a lot of people also don’t think is this:

    Do any consumers have any kind of brand loyalty to the music labels?

    Can anyone name what label the top 5 or 10 acts are signed with? If your favorite band is, let’s say, Green Day, would you care if you heard that they were changing labels?

    No one cares. If my favorite band is with Universal, I’ll probably follow them whereever universal takes them, but not because of any loyalty to Universal.

  10. Govt Skeptic says:

    Alex, I think you’re missing the point.
    Your favorite band IS your favorite band BECAUSE Universal pumped them up. There are thousands of talented musicians who never see real success because they’re not signed by a major label. The major labels own the consumer’s brain, and they’re reluctant to give that up to anyone.
    Sure, consumers don’t know Universal from Sony BMG, but that doesn’t matter. They also don’t know Yum Brands or Citigroup, or that Saab is a General Motors subsidiary. Brand loyalty is a fiction in the world of conglomerates.
    Mmm, Coke tastes good. Back to work!

  11. “Your favorite band IS your favorite band BECAUSE Universal pumped them up. ”
    that is going to be increasingly false with the time.

  12. If that was all bluff and Apple risked nothing, why do the new contract seems less interesting for Apple ?

  13. Anonymous says:

    I think that the underlying issue is that the record labels have a buggy whip maker mentality, cannot see that the days of their role in the industry are numbered, and seem to see DRM systems as some sort of salvation.

    A good example of the way things are going is the release last Sunday of Prince’s latest album in the UK – it was given away free with a newspaper. The result was huge sales, more money for the performer than would ever arise out of releasing it in the traditional way, and the label and stores eliminated from the supply chain entirely.

    Also, on a nostalgic note, Sony have started suing Amergence group who are the successors to SunnComm over the audio CD drm fiasco a year or so ago. I wonder whether First4Internet (since renamed Fortium Techologies), purveyors of XCP, will follow?

  14. Lawrence D'Oliveiro says:

    iTunes’ success has supplied the major counterargument, suggesting that it’s possible to sell lots of music online.

    Actually, it’s the iTunes Music Store, not iTunes itself. And iTMS has not sold “lots” of music online–the average iPod user only gets a small percentage of their music from iTMS. So the whole legitimate download business is still a drop in the bucket, compared to, say, the ringtones business (which is huge). So there’s no surprise that labels like Universal are still trying to experiment with ways to get more sales.

  15. Kaleberg says:

    Back in the 1970s WTBS (now WMBR) the MIT radio station used to broadcast a great [hack] ad for Warner Brothers. “It’s the vinyl”, intoned the announcer, “Warner Brothers drills deep to extract rich natural streams of raw vinyl”. It was hard to come up with ad copy like that for CDs. What are they made of anyway? The bits at the iTunes store? They could have been nightly builds of Leopard a week ago, and now they’re selling them as music. Maybe the death of brand loyalty in the music world has something to do with the death of vinyl LPs?