Apple Has Upper Hand in Music Negotiations

When Apple Inc. sits for contract negotiations with the major record companies over the next month, it will probably seek further concessions from them on selling music without copy-protection software.

The owner of the market-leading iPod digital media player and iTunes online music store has already cut an early deal with EMI Group, the third-largest record company, and enters talks with the other labels from a position of strength, according to music industry executives.

That leaves Vivendi’s Universal Music Group; Sony BMG Music Entertainment, which is a joint venture of Sony Corp. and Bertelsmann; and Warner Music Group in a tough spot.

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“EMI struck a deal that puts all of us at a disadvantage,” said a music executive who spoke on condition of anonymity. He said EMI had agreed to let Apple sell its music without anti-piracy protection to please shareholders concerned that the record company was behind in the digital music race.

For its part, EMI argues that the anti-copying software, known as digital rights management, has been frustrating for consumers.

“We believe removing it will boost digital music overall,” said an EMI spokeswoman.

Universal, Sony BMG and Warner will aim to steer contract renewal negotiations with Apple to discussions on variable pricing for songs, a subscription service for iTunes, and more bundling of tracks and other features into digital packages, music executives and analysts say.

The separate talks are scheduled to start toward the end of April and go into the summer.
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The music companies also want to improve their margins on the wholesale pricing of digital songs. There has even been talk of getting a cut of sales of iPods themselves, or future devices such as the highly anticipated iPhone set for availability in June.

But analysts see that as unlikely, with EMI’s deal probably pushing the issue of dropping digital rights management to the top of the agenda.

In February, Apple Chief Executive Steve Jobs urged all four majors to drop DRM, a move cynical observers said was sparked by the pressure his company faces from European regulators to open the iPod/iTunes family to other technology platforms.

The labels were already beholden to Apple, which has more than 80 percent of all digital music download sales in the United States. Apple said last week it has sold 100 million iPods since it introduced the product in 2001.

Some music industry observers say the issue is not DRM but interoperability. Apple’s proprietary FairPlay protection technology prevents the playing of songs downloaded from iTunes on other digital players besides the iPod.

“EMI rushed into that deal,” says Ted Cohen, who left a senior position at EMI last year to set up consulting firm TAG Strategic. “It would have been better to put pressure on Apple to open up FairPlay to make it interoperable across multiple platforms.”

The other three music companies say publicly that they are only experimenting with dropping DRM, but privately, executives accept that following EMI’s move it is only a matter of time. The industry will be watching Universal Music, which dominates with a market share of about 30 percent.

“If Universal goes, then everyone has to follow,” said the first music executive. Some media reports and analysts say a move by Universal to drop DRM may be imminent through a partnership with online retailer Amazon.com Inc. that could be announced in May.

Cohen says Universal, Sony BMG and Warner will watch what happens with EMI’s DRM-free catalog.

“I have a strong feeling there’s not going to be a move for at least 60 days by any of the other majors,” he said. “If all of a sudden EMI starts increasing market share in digital sales over that period, then they’ll have to act.”

Analysts say the record companies hope to talk Apple into introducing a subscription model similar to those offered by the likes of RealNetworks Inc.’s Rhapsody service.

EMusic, which is the No. 2 online music service behind iTunes and does not carry repertoire from major labels, has had success with its subscription service and signed up its 300,000th subscriber this month.

“The record companies like the idea of the recurring revenue,” said Gartner analyst Mike McGuire. “The challenge will be to convince Apple that it’s worth the extra costs involved in setting it up.”

All four record companies, including EMI, declined to comment on their negotiations with Apple.