April 2005
Music moguls trumped by Steve Jobs?
By John Borland
Staff Writer, CNET News.com
When Apple Computer CEO Steve Jobs walked into the suites of top record
label executives in 2002, iTunes software in hand, he was welcomed as a
trailblazer to a digital music future.
Now, nearly two years after Apple's iTunes launch, record executives
have become worried that they have inadvertently ceded too much power
over their industry to this charismatic computer executive.
Frustrated at what they see as Jobs' intransigence on song pricing and
other issues, some record executives are now turning their hopes toward
other partners, particularly mobile phone carriers eager to get into
the business of selling music. They see this new focus as a way to
broaden the digital music business, and lessen Apple's dominance over
their market in the process.
"The (wireless) carriers' economics are aligned with us much better
than Apple is aligned with us," said one senior executive at a major
record label, who asked to remain anonymous because of his company's
ongoing relationship with Apple. "The mobile market is very important,
as important to us as the PC."
Jobs is given undeniable credit for jump-starting what is now a
fast-growing digital music market, but some music executives complain
that his company, with 70 percent of the digital download market, is
setting the ground rules for their own business.
While iTunes is designed to propel the sales of iPods--more than $1
billion worth in the last quarter alone--the labels complain that
Apple's policies are insensitive to their goals and limit their ability
to grow their digital business even faster.
For example, Apple wants to sell all its songs for 99 cents each, a
single price point that's easy for consumers to understand. But the
record labels have pressed for the ability to vary prices to maximize
their own sales. They want to sell older titles at a discount--like the
$9.99 CDs available in most record stores--and charge more for popular
songs to take advantage of market demand.
Jobs also has refused to license Apple's antipiracy technology, called
FairPlay, to rival MP3 player makers, and has blocked music formats
from other companies, such as Microsoft, from the iPod. This makes
iPods and the iTunes store incompatible with rival digital music
devices and stores, fragmenting the market in a way the labels fear
ultimately limits sales.
"We hate the current situation," one top record industry executive
said, referring to the issue of incompatibility between different
companies' music devices and services. "There is one man who's going to
decide this...No record company by itself can basically tell Steve
Jobs, 'You're not going to get our catalog unless you open up FairPlay
to Microsoft.' We can't do it together."
Apple declined to comment for this story.
Despite the critics, Apple continues to win praise from many customers
and industry analysts. They point to Apple's clear success in spurring
the download business as proof that Jobs is on the right track with
pricing and other policies.
"Apple really understands that pricing models are critical," said
Jupiter Research analyst Michael Gartenberg. "I think 99 cents
resonates with consumers as a sweet spot."
Many customers like the convenience and pricing. "iTunes really sucks
you in," said Jackie Kerr, an iTunes customer in Baltimore. "I don't
mind the 99 cent cost, though sometimes I do feel stupid for paying $1
for some horrifying '80s band I don't want to admit liking."
When iTunes launched, most of the record labels were more squarely in
Apple's camp. Part of the reason was Apple's limited role in the
computer industry: They saw the Macintosh market--less than 5 percent
of the total U.S. computer market--as a small, relatively safe way to
experiment with Jobs' ideas.
Instead, iTunes, replicated on the PC platform a few months later,
exploded into a popular hit that almost overnight defined the standards
for the digital music business. Apple's iTunes store captures close to
70 percent of digital music sales, according to the most recent analyst
figures. The iPod holds a similar share in the portable MP3 player
market.
"I think it's safe to say that Apple has generated so much interest in
digital music downloads as a paid service, the labels clearly
understand Apple's influence," Gartenberg said.
Wireless, the music industry's new savior
For the most part, the labels have remained loath to push too
forcefully against the company that still accounts for the vast
majority of their new online sales.
Instead, they are turning hungrily to the mobile phone market, where
phones are slowly gaining the capacity to play music. Executives note
that there are many times more cell phones than iPods in the world,
potentially offering a far larger digital music market. Already
full-song download services for cell phones are operating in Europe and
Asia, and are expected to come to the United States as soon as this
year.
Part of the mobile market's attraction comes in pricing. Consumers
around the world have shown they will eagerly pay $2.50 or more for a
ring tone, a mere snippet of a song that costs just 99 cents for the
full version at iTunes. Labels see these consumers as receptive to
variable prices for different songs.
But some music executives also describe mobile carriers as simply
better potential partners than Apple. Like the labels, the carriers'
bottom line depends directly on selling content, while Apple's profit
sheets depend on hardware sales.
The carriers' interests were underlined in the case of Motorola's
iTunes-enabled cell phone, announced nine months ago but now delayed.
As described by the companies, the phone would let people transfer
their iTunes-purchased songs from computers to the phone.
Publicly, carriers say they are interested in the idea and will offer
the phone to their customers if there is demand.
"Ultimately, the consumer is the boss," said John Burbank, vice
president of marketing for Cingular Wireless. "We're going to create
products that best match what the consumer wants to do."
But mobile industry sources say some carriers have been critical of
Motorola's move, which would encourage consumers to buy music on a
computer rather than over the phone network. Because most phones are
sold with a substantial subsidy from the wireless carrier, their lack
of interest has set back the release of the iTunes phone.
"Carriers subsidize phones and features when they drive network usage,"
said Iain Gillott, a wireless industry consultant. "Yet here was a
phone that I was supposed to sync to my PC so I could buy music from
Apple. Why would the carriers subsidize that?"
None of this means the labels are likely to stop dealing with Apple.
Indeed, the companies continue to work closely behind the scenes
discussing issues such as CD copy protection and new promotions. And
label executives are quick to commend Apple for doing more than any
other company to create the digital download business.
And any business relationship, particularly in new arenas, is bound to
have its bumps, insiders say.
"The relationships are really better than ever," said Cary Sherman,
president of the Recording Industry Association of America. "Everybody
understands where the other side is coming from. Everybody understands
that there is a market here, and everybody's trying to find a path. The
dialog is healthier and more wide-ranging than it's ever been."
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