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The U2 iPod: Back when we were friends.
July 2, 2007 8:00 AM   Subscribe

Bob Lefsetz has been sharing his opinions on the music industry for years. In last night's newsletter, he announces, "Let the games begin!" - and indeed, let them. Universal Music has declined to re-sign to a long term deal with Apple, essentially leaving them open to exclusive deals with other services. The fact that Doug Morris (chairman of UMG) and Zach Horowitz (President of Universal's parent company, Vivendi) have been gearing up to loosen the stranglehold that iTunes has on online distribution is not exactly news. They've used similar tactics against Microsoft's Zune and YouTube. But with the release of the iPhone and following his well-timed decision to openly "share his thoughts" on DRM, not to mention his landmark deal with (perennial "armpit of the industry") EMI to sell their music DRM-free and at a higher cost - the real question is: is Steve Jobs ready to play hardball?
posted by phaedon (48 comments total) 2 users marked this as a favorite

 
If Universal were to leave iTunes, or were Apple to stop selling their products, that would be a huge chunk of revenue that Universal would lose (15-20%). Steve Jobs is in a stronger position than Universal to dictate terms.
posted by Blazecock Pileon at 8:10 AM on July 2, 2007


I think Universal should open up their own music service and keep all the money for themselves. Because I am sure that tactic will be more successful than being on iTunes.
posted by Mr_Zero at 8:19 AM on July 2, 2007


I see what Universal is trying to accomplish here, but I'm pretty sure that Horowitz is going to blink first on this one. They're trying to take some away some Apple's insanely large leverage, but it might be a bit late to get that genie back in the bottle. They enjoyed the sudden rush of digital download revenues so much (almost entirely from Apple) that they forgot to position their deals to give Universal the upper hand. From here on out they're going to have to bend over for Apple the same way they do for Wal-Mart, Best Buy, and the other huge brick and mortar retailers. It's too large of a chunk of business to walk away from, and nobody in the record business is in the position to be able loose any more money right now.
posted by Slack-a-gogo at 8:20 AM on July 2, 2007


You know what I would do if I couldn't find a song on iTunes? I'd buy it somewhere else. On the internet that should take me a minute or two. I'm betting most other people are capable of this arduous task.

What exactly is Mr. Job's leverage?
posted by srboisvert at 8:26 AM on July 2, 2007


Most people, I wager, will look on iTunes, not find the song they want, and then head over to BitTorrent or whatever - it's not like iTunes is going to have a big notice when my search comes up blank saying, "Hey bro, you know that song you were looking for just now? Yeah, it's over on this totally different Universal site, where you might have to deal with weird restrictions and pricing and possible non-compatibility. Just thought we'd let you know."
posted by mdonley at 8:27 AM on July 2, 2007


The real question is whether there was any reason for UMG to pre-emptively announce this now, other than to put a cigarette out in Apple's massive birthday cake of iPhone hype. Timed for maximum damage. They may still cut a deal, but notice has been served.
posted by anser at 8:27 AM on July 2, 2007


In other news, BitTorrent stock prices have gone through the roof!
posted by tittergrrl at 8:28 AM on July 2, 2007 [1 favorite]


It's interesting that music companies seem to think they're entitled to profits from the iPod. Or maybe not interesting, but insane.

What exactly is Mr. Job's leverage?

100 million iPods, which only connect with iTunes. Yeah, if you couldn't find a song on there, you'd go elsewhere. But if you're in the midst of spending spree and can't find that song, while finding 5 others, you just might skip it.
posted by Brandon Blatcher at 8:31 AM on July 2, 2007


Ditching iTunes is only half of UMG's plan.

The other half involves trying to convince Microsoft to pony-up a $1000/Zune purchase royalty.

Hell, they won't even need artists after that.
posted by mazola at 8:39 AM on July 2, 2007


It's only really interesting if neither side blinks. Apple loses the ability to sell titles from the largest record company, and Universal loses the source of 15% of its revenue.

My guess is that Universal never pulls its titles, and Apple gives them a slightly higher royalty rate.

Full Disclosure: I stopped buying from itunes in Feb, when I switched to emusic, and I've never missed that ugly beast.
posted by drezdn at 8:49 AM on July 2, 2007


What exactly is Mr. Job's leverage?

iTunes music store purchases are not the lifeblood of Apple. The average iPod user has purchased only about 22 tracks through their online store, if I recall correctly.

The overwhelming bulk of tracks on iPods come from other methods (CD rips, other online music services, P2P) which will continue should UMG remove their catalog from iTunes.

Pulling UMG tracks from iTMS will only serve to make UMG artist invisible to a whole lot of music listeners.

Good luck with that plan, UMG!
posted by mazola at 8:51 AM on July 2, 2007


For those keeping track, Apple is now the third largest music retailer (9.8%) behind only Wal-Mart (15.8%) and Best Buy (13.8%). They jumped from 7th to 3rd in the last 18 months. And they claim somewhere around a 85-90% share for online music purchases.
posted by gwint at 9:00 AM on July 2, 2007


(I'm really curious to know how many of the 500,000 new iPhone owners were existing iPod owners)
posted by gwint at 9:02 AM on July 2, 2007


One interesting fact I didn't know, most of the music company execs who ran the industry into the ground in the late 90s and early part of this decade are no longer there. They were apparently all thinking they just needed a "big hit" to get back into the game (this was from an article, I think in rolling stone linked here on mefi a couple of weeks ago)

Will Steve Jobs play hardball? Who cares? The future is DRM-free music anyway.
posted by delmoi at 9:04 AM on July 2, 2007


The overwhelming bulk of tracks on iPods come from other methods (CD rips, other online music services, P2P) which will continue should UMG remove their catalog from iTunes.

And...

Pulling UMG tracks from iTMS will only serve to make UMG artist invisible to a whole lot of music listeners.

What listeners? The ones you claim don't even exist?
posted by delmoi at 9:06 AM on July 2, 2007


Unless I'm misunderstanding, isn't UMG just not signing a long-term contract with iTunes? That is, can't they still sell their music on iTunes for as long as it suits them, but they're just not committing to be exclusive for any longer?

Maybe I'm confused, but it seems like maybe their plan is to keep selling their music on iTunes until they have other systems in place to challenge iTunes. I mean, it would seem pretty stupid to just flat-out drop whatever (15-20%?) of their revenue comes from iTunes.
posted by Zephyrial at 9:06 AM on July 2, 2007


isn't UMG just not signing a long-term contract with iTunes?

The NYT says that it doesn't want to sign an annual contract. "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..."

I wouldn't go for that if I were Apple. A year is not an excessively long term for a contract.
posted by grouse at 9:11 AM on July 2, 2007


What listeners? The ones you claim don't even exist?

Yup. The ones who use iTunes as a tool, to preview tracks, and see what's on the homepage. It's worth a whole lot more as a promo tool than as a store.

UMG pulls its catalog at its own peril.
posted by mazola at 9:12 AM on July 2, 2007


And finally, it's easy to overstate the strengths and weaknesses of both parties. The bottom line is that if UMG pulled out of the iTMS life would go on for both.

UMG stands to lose more revenue than Apple does, at least in the short term. As for the long term, it depends on how important you rate online distribution and if you see cracks in the iPod juggernaut.
posted by mazola at 9:20 AM on July 2, 2007


Bob Lefsetz is not afraid of hyperbole or exclamation points.

Awesome.
posted by beaucoupkevin at 9:21 AM on July 2, 2007


"saying “we believe that not every song, not every artist, not every album, is created equal.”"— Warner exec

See, and here's another problem. While I think that on some level he's right, the exec's position should be that Warner represents recording excellence, and that while that Eagles track (dunno if they're even Warner but bear with me) might be worthless to me, there's someone else that absolutely loves it. By saying that they put out music that's not as worthwhile as other music, they're calling for their whole catalog to be evaluated, and in the face of "free" music from filesharing, that valuation is likely to be far lower than they'd like.

Though it would be interesting to see a service with reactive pricing, where demand drove things to be more costly, and where I could pick up high quality Ed Sanders tracks for pennies.
posted by klangklangston at 9:24 AM on July 2, 2007 [1 favorite]


"Bob Lefsetz is not afraid of hyperbole or exclamation points."

He capitalizes and bolds like Stan Lee on a meth binge.
posted by klangklangston at 9:25 AM on July 2, 2007 [3 favorites]


iTunes only accounts for 3.6% of Apple's revenue. If one vendor that supplied a fraction of that amount didn't want to do business, would you blink?
posted by machaus at 9:27 AM on July 2, 2007


One Moment Please.

Connecting to the iTunes Store.

Loading...


We are unable to find iTunes on your computer.
posted by srboisvert at 9:31 AM on July 2, 2007 [1 favorite]


If UMG wants to go unprotected, they might as well sell the tracks themselves and keep all the money. Once they dont have to license copy protection (WM, Fairplay, etc), they can open their own shops and keep all the money.

Though I dont think a demand-driving pricing scheme would work. Why? People would actually go and seek out new/different material and make the industry harder to predict in terms of popularity. If people's interests were less concentrated (as opposed to punk/goth/emo/whatever the latest trend is) then predicting success would be more difficult. You want your audience to be sheep because it makes them easier to predict and force music upon.
posted by SirOmega at 9:33 AM on July 2, 2007


Wow, phaedon, great post. I was expecting to see something about this on metafilter, but this is actually a well-researched and link-filled post. Props.

If I were a Universal artist selling most of my music on the iTunes store, and Universal pulled the plug, I'd be frothing at the mouth. If I were a Universal shareholder and Universal walked away from 15% of its revenues in a game of chicken I'd be irate.

Universal seems to want steaks made from their cash cow. Good luck with that!
posted by mullingitover at 9:33 AM on July 2, 2007


Universal needs Apple way more than Apple needs Universal. Losing the Universal revenue would be just a small fraction of Apple's revenues (maybe 1%, when Universal is really hot), but without Apple, Universal could lose 10% of their annual revenues. And that number is going to grow considerably over the next year. Plus this would be an internal PR nightmare with the artists and labels in the Universal roster.

For customer satisfaction Apple would like to keep Universal represented, but they don't need it to keep the lights on. Without that 10+% (and growing) of annual business, Universal will be letting people go. Savvy record buyers and computer users know how to go elsewhere to buy music, but the majority of music consumers currently only know iTunes, so the odds of many of them venturing elsewhere are pretty slim.

That's the leverage Universal is trying to take back. Most of this is actually due to iTune's refusal to allow variable pricing (other than the DRM free deal), which is something all of the major labels seem to want. That would mean the ability to sell some downloads at iTunes at a lower price (developing artists mostly and maybe even week of release to spike first week sales - another antiquated record business tradition). But obviously Universal is more interested in being able to charge more for the superstar acts. Or really anything they think someone might pay more for. Shareholders love increased revenues as much as music fans enjoy paying less for music.
posted by Slack-a-gogo at 9:57 AM on July 2, 2007


If Apple is smart, they won't budge--they won't give UMG a point more as that's a slippery slope. Were I Jobs, I'd say, "Fine. Pull your tracks. But, since you seem to have no prob with an uneven percentage (ie, you want more points than the other labels are getting), when you decide to come back, you're the ones that will be getting a point less. Cool?" Obviously, UMG won't be happy with that and, should they pull their tracks, they'll never come back, leaving all their competition with a greater number of online track sales. I don't think any other label will follow UMG off the plank.

The other half involves trying to convince Microsoft to pony-up a $1000/Zune purchase royalty.

Hell, they won't even need artists after that.


Yeah, they'll just sit on top of that pile of $3k. ;)
posted by dobbs at 10:02 AM on July 2, 2007 [1 favorite]


Apple sucks.
Itunes sucks.
Universal sucks.
Steve Jobs sucks.
The music industry sucks.

Next?
posted by disclaimer at 10:21 AM on July 2, 2007


Your favorite industry sucks?
posted by Rock Steady at 10:31 AM on July 2, 2007


they can open their own shops and keep all the money.

They could do this with physical stores too, but they don't. This sales strategy apparently works only for a few products, e.g. cars. For everything else, it apparently works best to sell everything in one place. Hence we have malls, Walmart, and iTunes. Granted, sales are a lot more distributed online, but they still center around a few big stores, e.g. Amazon.
posted by scottreynen at 10:33 AM on July 2, 2007


Two Lefsetz links? Did we really need two links to one hack telling us what we already know--that the music industry is proper fucked?

I'm partly kidding. Nice post, phaedon.
posted by Saellys at 10:46 AM on July 2, 2007


iTunes only accounts for 3.6% of Apple's revenue. If one vendor that supplied a fraction of that amount didn't want to do business, would you blink?

I gave up emusic because half the time searches came up blank. A lot of the credibility of the iTMS is in not being like that. Losing a major label would be a much bigger deal than just the revenue.

Of course there's no implication that UMG plans to pull its catalogue anytime soon, just to threaten to until they get a better deal.
posted by cillit bang at 10:46 AM on July 2, 2007


Uniform pricing is the one thing I think Apple gets right with iTMS. I don't go in for the popular stuff but mainly use iTMS for back catalog and the more obscure stuff that I find there. With variable pricing I might save a bit on back catalog but the Emperor Penguin or Squarepusher tracks I'm interested in (for example) would be priced the same way they are in a brick/mortar store. That is to say, they're full price and you'll never see these titles go on sale. They cost more precisely because they don't move as fast and the demand for these titles is not so elastic so they'd sell the same number no matter the price--within reason.

UMG isn't so much interested in promo pricing this week's crap as they are in pulling more coin for their peripheral offerings. That The SteveTM fights this with uniform pricing is the main reason I purchase from iTMS.
posted by Fezboy! at 10:56 AM on July 2, 2007


The other factor in this being a retarded idea for Universal: the spin. Apple would get to say, "Universal said if we didn't jack up rates, they'd take their toys and go home. Homey don't play that." Cue a thousand blogs and a million forum posts condemning Universal. An indignant Boing Boing. PR holocaust. Eventually, employee layoffs. Boycotts. Artists leaving in herds. People getting rich from shorting their stock.

I sorta hope they do it.
posted by mullingitover at 11:01 AM on July 2, 2007


Every time I see major corporations acting like schoolchildren, I hope they'll lower the bar even further. I would love to see Universal pull their catalog from iTunes, so that whenever someone searched on iTunes for a Universal artist they'd see a message reading, "We at Apple think you deserve the most music choices possible. We wish that you could download every song ever recorded from iTunes. Unfortunately, the people running Universal don't agree. They don't want you to download their songs from us. That's why you can't find the artist you're looking for. Sorry."
posted by Faint of Butt at 11:04 AM on July 2, 2007 [2 favorites]


Boy the record industry is doomed articles are coming out all the time... 'F*cked' record companies in 'cataclysmic' meltdown.

Here's another one, Megastars play to empty seats after fans balk at ticket prices, the funny reasoning is that because of piracy artists have to raise prices on tickets to compensate... which isn't working because before ticket prices were set at what the market will bear, not as a loss leader. Somehow some artists have managed to convince themselves they were charging too little for tickets before.
posted by bobo123 at 11:06 AM on July 2, 2007


Cue a thousand blogs and a million forum posts condemning Universal. An indignant Boing Boing. PR holocaust. Eventually, employee layoffs. Boycotts. Artists leaving in herds. People getting rich from shorting their stock.

Cue?
posted by cillit bang at 11:46 AM on July 2, 2007


is Steve Jobs ready to play hardball?

Dude, Steve Jobs plays hardball when you look at him wrong. He's an asshole. it's like asking if accountants are ready to account.
posted by John Kenneth Fisher at 12:14 PM on July 2, 2007 [1 favorite]


I agree with the consensus that Apple has the least to lose here. Record companies (and the corporations that own them) still seem to think they deserve to profit most in all this. This is a habit, I suppose, borne of 6 or 7 decades of interpositioning themselves between artists and listeners, and leveraging that to exploit all parties for maximum profit.

I hope Universal/Vivendi gets a rude awakening. Music should be a business only to the extent that some infrastructure is needed to get music to listeners, and those who make the music need to earn a living.

This is why I hope Jobs' model wins--by keeping iTunes revenue as a relatively unimportant part of Apple's business, he prevents record companies from dictating the terms of, really, how the art form will exist (--hyperbole, but not by much--); as well, he places music (and other media)--which offers an experience with which people have strong bonds--a little bit outside of the realm of mere commodity. To me, it's a much more respectful stance toward music itself, and those who make and listen to it. It might eventually prove to be liberating to the art form, as well.
posted by LooseFilter at 12:15 PM on July 2, 2007 [2 favorites]


Universal needs Apple way more than Apple needs Universal. Losing the Universal revenue would be just a small fraction of Apple's revenues (maybe 1%, when Universal is really hot), but without Apple, Universal could lose 10% of their annual revenues.

This is a really interesting angle on the story, but keep in mind that while it is true that Apple has many other major sources of revenue to rely on, this doesn't automatically translate into leverage against Universal.

What is going on internally at Vivendi is probably of greater import, although I can't speak to it. The question would be: how many units is Universal selling online, and how much money could it make if it sold it to a preferred distributor as opposed to iTunes? And better yet, what if Universal owned said distributor, and reaped income from advertising? That's where the real money is at.

In this sense, at the end of the day, Doug Morris is just another captain of industry trying to hold on to his job and keep his company off the chopping block. Where in fact, it doesn't appear Jobs is going anywhere.
posted by phaedon at 12:22 PM on July 2, 2007


I really hope UMG goes its own way. I can only see great benefits to my own consumer self if they do.

If UMG succeeded in launching their own competitive music store that was even better than iTunes, then I really get to come out ahead: more player choices connecting to more excellent services. Works for me!

If UMG dies, and fuck I hope it dies, then I really get to come out ahead: a whole bunch of artists who are going to be seriously pissed at UMG's dumbass move, and will flock back to iTunes to, hope against hope, represent themselves sans record label and RIAA thuggery. Works for me!
posted by five fresh fish at 1:38 PM on July 2, 2007


Universal wants:

• to be able to charge more for music
• to make its songs playable on devices other than the iPod
• to be able to sell music on other stores and have it be compatible with the iPod

EMI has already gotten all these things (while looking like good guys), simply by letting go of the useless pipe dream of DRM.

I just don't understand what kind of Wormtongues are whispering into these record execs' ears, making them think that DRM is still worthwhile. Hey, guys. It doesn't work!
posted by designbot at 1:57 PM on July 2, 2007 [1 favorite]


OK, here's the deal, when UMG says "variable pricing", what they really mean is tracks starting at .99 and going up from there. They may once in a blue moon put some tracks below that (and over hype it if they do) but for 98% of thier catalog it will mean starting at .99
posted by CCK at 4:34 PM on July 2, 2007


I've POSTULATED for a WHILE that the Lefsetz Letters are WRITTEN by that McElwaine guy from Usenet.
posted by First Post at 4:36 PM on July 2, 2007


And thus UMG becomes irrelevent, because artists will be able to negotiate a better contract with Apple and Google.
posted by five fresh fish at 5:41 PM on July 2, 2007


How is it exclusive when Universal seems to be on Napster, Rhapsody, and so on?
posted by meehawl at 7:46 PM on July 2, 2007


Exclusive, in the sense that they exclude Apple.
posted by phaedon at 8:24 PM on July 2, 2007


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