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Record Labels May Mix It Up With Apple's iTunes

By Jay Lyman MacNewsWorld ECT News Network
Aug 29, 2005 1:30 PM PT

Unhappy with the Apple iTunes industry standard price of songs at 99 cents each, some record labels are looking to introduce different pricing -- and possibly different players in addition to the wildly successful iPod -- to online music.

Record Labels May Mix It Up With Apple's iTunes

However, industry analysts stressed the immature nature of the digital music market, indicating that a price push without additional offering would more likely drive consumers to free online music trading, which has still reportedly doubled since lawsuits against alleged illegal file-traders began.

Nevertheless, major labels Sony BMG and Warner Bros. have not licensed their music for the most recent iTunes service rollout in Japan, and contracts are coming up for renewal as the two companies are seeking a departure from the iTunes model.

"The dispute is about the extent that [Sony BMG and Warner] have not licensed their music for [Apple's] Japanese services, which is significant, considering Japan is the second biggest market after the U.S.," Yankee Group senior analyst Mike Goodman told TechNewsWorld. "It's a question of existing contracts versus future contracts," he added.

Picking on Price

Goodman indicated that the two companies -- Sony in particular and Warner less so -- were both interested in a departure from Apple's one-size-fits all pricing for songs on iTunes, which currently offers music from all of the major record labels in the U.S.

"They want a variable pricing model," he said, adding that he was skeptical of a model where consumers might pay more.

"You're talking still -- as much hype as there has been -- about a nascent market," Goodman added. "Do you really want to start raising prices on a market that is a drop in the bucket [of overall revenue]?"

Referring to industry revenue figures of $189 million for digital downloads and $11 billion for CD sales, Goodman added that an increase in price would likely prompt more use of unlicensed, peer-to-peer (P2P) services.

'Nuclear Option'

Goodman also referred to the hardware side of the issue, indicating that while Apple makes as much as a 27 percent profit on its sale of iPod players -- which reportedly account for a third of the growing market -- the record companies see none of that revenue, and are interested in more interoperability and the decline of Apple's dominance.

Ultimately, the labels have the leverage of content, a pre-requisite for a legitimate online service, but so far Sony and Warner have withheld content from the Japanese market, Goodman said. Releasing the floodgates -- or at least going over Apple's head to deliver content directly to consumers themselves -- would be "the nuclear option," Goodman said.

"It's absolutely the last thing the labels want to do," he said. "It's unlikely, but it kind of hangs out there."

Dollar Store Standard

Gartner analyst Mike McGuire told TechNewsWorld that the 99-cent price point of Apple's iTunes -- repeated by almost every other licensed online service -- has become a standard for consumers.

"That's one expectation the consumer has," he said. "The notion of raising the price with no additional benefit ... I would say that would be a very bad move, strategically."

Stressing the early development of the online music market and its potential, McGuire said Apple, the record companies and other players involved all have to cooperate to maximize market success.

"All parties are dependent on a higher level of cooperation than you're seeing now," he said. "It just doesn't make a lot of sense to be flexing on price."

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