Heated Christmas call from Jobs secured iTunes changes

[AppleInsider]

A new report claims to give details on negotiations between Apple and the music labels which ultimately led to the recent changes made to the industry-leading iTunes Music Store.

Apple announced DRM-free music at Macworld last month while bowing to several years' worth of demands for variable pricing from the major labels in exchange.

According to the New York Times, the deal almost fell through at Christmas time. Apple had reportedly offered the labels a variable pricing deal last spring that would go into effect this April in return for wireless 3G downloads to the iPhone in January and the removal of FairPlay digital rights management from all songs on the iTunes Store.

Every label except for one signed on. Sony Music chairman Rolf Schmidt-Holtz wanted variable pricing to go into effect immediately upon the announcement of over-the-air song downloads while Apple chief executive Steve Jobs insisted on a waiting period, demanding variable pricing on the iTunes not go into effect until April of 2009.

"According to a person briefed on the telephone call, Mr. Schmidt-Holtz and Mr. Jobs had a heated exchange by phone on Christmas Eve," the Times reported. "Eventually, Sony gave in and agreed to a longer waiting period."

This is the latest in what at times has seemed like a long standoff between Jobs and music industry leaders. Not long after the iTunes Music Store was launched in 2003, Apple and the labels were at odds over everything from the price of songs to DRM to what gets promoted on the store's front page.

Background

In actuality, the competition began long before the launch. In a 2006 interview, Jobs described lengthy back-and-forth negotiations with record labels just to get the store off the ground.

"It was a process over 18 months," the Apple chief told Newsweek. "We got to know these folks and we made a series of predictions that a lot of things [the labels] were trying would fail."

It wasn't long before Apple's brain trust was proven right.

"Then they went and tried them, and they all failed, for the reasons that we had predicted," Jobs said. "We kept coming back to visit them every month or two, and they started to believe that we might actually have some insight into this."

Apple wields tremendous control in any negotiations thanks to its dominance of the online music download market. Labels can't afford to pull their catalog off the digital shelves without suffering significant losses, but that hasn't kept their executives from playing hardball.

In July 2007 Sony head Sir Howard Stringer reportedly characterized Jobs as a "greedy" hypocrite who was accusing the labels of being overly interested in money while at the same time trying to funnel money only to his company.

Around the same time, Universal Music Group and Apple were in a showdown over fixed 99-cent pricing as the chairman of Warner Music Group stated the labels' position (speaking about their own artists) that "not every song, not every artist, not every album is created equal." The labels wanted to price hot new tracks at higher prices to maximize profits at the height of their popularity. When Apple refused to budge, Universal threatened to pull its songs once the contract expired.

Universal and its peers had also demanded for months that Apple license FairPlay DRM to other sellers so tracks purchased from iTunes could be played on any device, claiming that was better for customer choice.

Instead, Jobs turned the tables, penning a February 2007 open letter in which he argued the labels should drop DRM altogether if they truly want interoperability. According to Jobs, licensing FairPlay would only have make it easier to circumvent once Apple disclosed its secrets to many people in many other companies.

"[Going DRM-free] is clearly the best alternative for customers," he wrote, "and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store."

In response, Warner's Edgar Bronfman said Jobs' suggestion was "completely without logic or merit" while the RIAA missed Jobs' entire point and welcomed the non-existent offer to license FairPlay to other companies.

It also merits repeating that unlike Microsoft's agreement to give Universal a cut out of each Zune device sold, the labels don't get a penny from each iPod or iPhone that Apple sells.

Future Negotiations

While Apple has finally agreed to variable pricing to score its goal of DRM-free music, other battles could still loom ahead. In today's New York Times report, many executives say the future of music buying will be monthly subscription fees to vast catalogs that could be heard on customers' mobile phones.

While Jobs has never ruled out such a platform, he has also repeatedly rejected it on the grounds that "People want to own their music."

Music labels believe subscription models can boost revenues. Apple is already believed to have developed such a service, but hasn't pulled the trigger since, in Jobs' view, the subscription model has failed in the marketplace.

As recently as last March, Apple may have considered charging an added premium for iPhones and iPods in exchange for unlimited iTunes Store access. The key to any such service would involve whether or not the tracks "explode" when the service expires. Any successful strategy would most likely let people keep the songs they've already downloaded, considering Jobs once excoriated the subscription concept as "renting music".

Another point of contention could be who controls what music is promoted on the front page of the iTunes Store.

"Whether the industry likes it or not, the iTunes chart showing the most popular songs in America is a major influencer of how kids today discover and communicate with their friends what kind of music they like," former Epic president Charlie Walk told the Times. "It's a very powerful thing right now in American pop culture and immediately validates a hit song."

A March 2007 report explains many musicians now consider the iTunes front page a key to success, just as important as radio or TV airplay. Usually determined by staffers' tastes, promos on Apple's storefront also go to albums with discounted prices or exclusive tracks.

"[Apple] won't advertise your album unless you give them extra material," singer Lily Allen once complained.

Unlike other large retailers and online shops, Apple usually avoids paid placement, meaning companies can't "buy their way" to higher sales. As long as Apple continues to resist outside influence on its own iTunes Store frontpage, the dispute could be a major part of any future negotiations.

[ View this article at AppleInsider.com ]

[Timon]

The subscription model mail have failed for music but not for video. I for one want to see a subscription service on iTunes much the same at NetFlix.

[elliots11]

I'm glad they got a DRM free deal worked out, but it's like these music industry guys keep coming to Apple with the worst ideas in the book. I wonder if they're serious about them, or if they just know that Apple won't bite, and they do it to have leverage against Apple's wishes.

I'd say no one could be that far out there and still run an industry, but they've lost billions, so maybe they can.

[quinney]

Originally Posted by AppleInsider

Unlike other large retailers and online shops, Apple usually avoids paid placement, meaning companies can't "buy their way" to higher sales. As long as Apple continues to resist outside influence on its own iTunes Store frontpage, the dispute could be a major part of any future negotiations.

Would the labels prefer iPayola?

[paxman]

Originally Posted by Timon

The subscription model mail have failed for music but not for video. I for one want to see a subscription service on iTunes much the same at NetFlix.

It works with video because no-one want s to own videos. OK OK, some do but I can not understand why and for the most part people don't (except for Kid's vids, of course). Video's and movies are usually watched once only so a subscription makes sense. Music is different. Much more personal and listened to over and over.

As for paid promotion on the iTunes front page - all power to Apple. I am not sure how long they can remain in control of that element but I hope the record companies never will gain control. Let them have a link to a clearly labelled 'Promotion's page' where they can battle it out.

[Virgil-TB2]

I love this part:

Originally Posted by AppleInsider

"[Apple] won't advertise your album unless you give them extra material," singer Lily Allen once complained.

As if a young thing like Lily Allen, working on her first album has any real insight into the "music business" (or business in general.)

This is like taking the opinion of someone opening their first Tim Horton's franchise on the state of the Food and Agriculture department.

[irnchriz]

Before itunes I used to download loads of Music for 'free' rather than buying CD's. Now I just buy all of my music on iTunes.

I agree that a subscription service similar to Netflix is a much better idea than for music. Look how well microsoft has done with the Zune marketplace recently.

[Virgil-TB2]

Originally Posted by paxman

It works with video because no-one want s to own videos. OK OK, some do but I can not understand why and for the most part people don't (except for Kid's vids, of course). Video's and movies are usually watched once only so a subscription makes sense. Music is different. Much more personal and listened to over and over.

As for paid promotion on the iTunes front page - all power to Apple. I am not sure how long they can remain in control of that element but I hope the record companies never will gain control. Let them have a link to a clearly labelled 'Promotion's page' where they can battle it out.

Well you said it yourself in this post, but it's worth highlighting that this is really just your opinion. Lots of people want to own video's and lots of people don't want to own music. Without figures on either side it's pretty useless to throw out statements of this type really.

[walshbj]

Originally Posted by Timon

The subscription model mail have failed for music but not for video. I for one want to see a subscription service on iTunes much the same at NetFlix.

Agreed ! http://murphymac.com/itunes-subscrip...rt-with-video/

[carloblackmore]

I've got a real easy solution for the label companies...
Since they're such expert masters of the music universe,
instead of depending on other people's creativity,
they should just create their own digital service
and make it better than iTunes.
Then they'll have all the leverage they want.
So what's taking so long Sony, EMI, Universal, Warner?
Ohhh, I forgot, you don't know how to!

[elroth]

Originally Posted by Virgil-TB2

I love this part:

As if a young thing like Lily Allen, working on her first album has any real insight into the "music business" (or business in general.)

She knows that she couldn't get her album on the front page of iTunes unless she gave Apple some exclusive bonus content (which she ended up doing). That means she knows a lot more than you do.

[Ireland]

Skinny and moody, what next?

[auxio]

I actually think having both a rental and purchase model for music makes sense.

For some people, music tends to be a sliding window of tastes which shifts with popular culture and/or whatever their social circle is listening to. So a rental model makes sense for this type of person since they won't likely go back and listen to music which has already passed through their window of interest.

For others (like myself), music is a vault filled with different emotions which fit different times, regardless of what's popular and what time period the music comes from. So owning music makes sense for me since I want to have that entire vault available at any given time.

Obviously it's not as black and white as that, but regardless, having both models gives people the flexibility to choose.

[tjs]

I purchase my music via iTunes but have yet to buy a movie or TV show. I've rented a number of movies, but am waiting for TV episode rentals. I would be much more inclined to rent a missed TV show for 99 cents than to have to purchase it for $1.99 or $2.99 just to watch it once.

[carloblackmore]

Originally Posted by elroth

She knows that she couldn't get her album on the front page of iTunes unless she gave Apple some exclusive bonus content (which she ended up doing). That means she knows a lot more than you do.

Actually, I wonder if she knows this for herself or if that's just what her record company and manager told her. And I wonder what was keeping Ms. Allen from providing bonus material in the first place? Perhaps because she's stuck doing whatever her stingy manager and contract force her to do?

[Virgil-TB2]

Originally Posted by elroth

She knows that she couldn't get her album on the front page of iTunes unless she gave Apple some exclusive bonus content (which she ended up doing). That means she knows a lot more than you do.

Nah. She's just a kid spinning the facts for her benefit.

Apple requires that if your album is going to be highlighted that you provide some kind of extra stuff (usually just a PDF with the lyrics or a bonus track actually), because it's, you know, ... a "promotion." Promotions are something that any fool in the industry is quite familiar with. Record companies ask for the same thing or more. So do some brick and mortar distributors. At least they did before digital distribution became the norm. This is all totally normal, expected stuff by anyone in the business.

I wasn't taking a dig at Ms. Allen, I like her music actually (well the first album anyway), but at the time she said this she was a twenty something kid working on her first record who thought she knew everything about everything (as most kids that age do.)

[8CoreWhore]

Originally Posted by Timon

The subscription model mail have failed for music but not for video. I for one want to see a subscription service on iTunes much the same at NetFlix.

Do you really want to return your favorite three songs before you're allowed to listen to the next song? Isn't a subscription service more like Pandora or Last.fm, etc..? You'd have to stream it over the air in order to listen to it. Yuk.

[alansky]

Music Labels = Money-grubing Morons

[arteckx]

Originally Posted by 8CoreWhore

Do you really want to return your favorite three songs before you're allowed to listen to the next song? Isn't a subscription service more like Pandora or Last.fm, etc..? You'd have to stream it over the air in order to listen to it. Yuk.

Napster is an example of subscription music service. Pandora and Last.fm are just customized streaming radio that adapt to the listener.

I used to have Napster in my PC days. I thought it was wonderful. I could download all the latest music and still have access to everything older. $9.99/month for listening on the computer. $14.99/month for Napster To Go which was the same except you could also put it on your PlaysForSure digital music player as well. You don't ever have to "return" something like normally associated with renting. The exception was if the music studio decided they weren't going to offer it online anymore, but that seemed rare.

I would definitely go for it if Apple offered something like that. Being able to download anything with no extra cost really allows you to explore what you might not if you had to pay per track. Bad music? No big deal, it didn't cost anything extra. Good music? If it's done right, you never can tell you don't own it.

[Rot'nApple]

Originally Posted by auxio

I actually think having both a rental and purchase model for music makes sense.

I hope you are right. My music tastes are limited. Even from the artists I enjoy, I don't care for everything they create and produce.

I would hate to pay a larger subscription fee each month for the occasional .99¢ song I want to purchase every now and then.

[Porchland]

I wonder to what extent the Beatles came up during the most recent round of discussions. It's almost comical how long iTS has gone now without having ANY of the Beatles catalog.

[pairof9s]

Although I know that Apple's primary intentions are to be profitable, I do applaud their stances and clout with the music industry. It seems, for now, to be in the best interest of consumers. With DRM now a thing of the past, I'm more willing to consider price variables; but not before.

I still think, and figures show this to be true, that Apple has devised the best solution for selling, distributing and using digital entertainment. I completely disagree with the music moguls that subscriptions are the way of the future. Music sales will tank even further at this blatant money grab. I'm sure it irks the moguls as far back as VHS rentals that video established the more lucrative process of consumer media purchases. At this point, any & every attempt to change this mentality has failed....music subscriptions will not succeed and forced selection will further erode music sales overall...piracy will prevail.

Still, I, like many here, would welcome a subscription service on iTunes for videos, television and movies. Like the antithesis of the music model, people have come to accept subscriptions for these types of media. In this area currently, Netflix has the better model.

/

[Techslacker]

Originally Posted by Virgil-TB2

I love this part:


As if a young thing like Lily Allen, working on her first album has any real insight into the "music business" (or business in general.)

This is like taking the opinion of someone opening their first Tim Horton's franchise on the state of the Food and Agriculture department.

That's a really bad analogy since someone could work in the business for years before starting any franchise.

[Wiggin]

Originally Posted by Virgil-TB2

Well you said it yourself in this post, but it's worth highlighting that this is really just your opinion. Lots of people want to own video's and lots of people don't want to own music. Without figures on either side it's pretty useless to throw out statements of this type really.

Without having any figures to offer, I would point out that for years there have been video rental establishments (ie, Blockbuster) but few if any music rental businesses. Yes, there are people that want to own movies and rent music; but this suggests that video is more "rentable" than music is. In part because of prices ($20 DVDs vs $10 CDs) and in part because of replayability (and now I'm just makin' up words!).

Personally (yes, just another opinion), if I want to own a movie I'll buy the disc not download it. So purchasing movies on iTunes is of no use to me. Rentals is where they should focus their time. And I don't have the time to sit at my computer managing a music subscription account, but I can see the benefit to those who have the time to do so.

[Fast Fred 1]

Originally Posted by quinney

Would the labels prefer iPayola?

What's preventing the Apple staff from taking payola on the sly for recommending select music. Since they are the ones who choose the music.
And another thing, what qualification's do they have. Aw gee Larry I sure like that country western dress on the chick.......

[Johnny Mozzarella]

Originally Posted by Virgil-TB2

I love this part:


As if a young thing like Lily Allen, working on her first album has any real insight into the "music business" (or business in general.)

This is like taking the opinion of someone opening their first Tim Horton's franchise on the state of the Food and Agriculture department.

What's a "Tim Horton's" franchise?
Is that like a Ponzi scheme?

[djames42]

Originally Posted by 8CoreWhore

Do you really want to return your favorite three songs before you're allowed to listen to the next song? Isn't a subscription service more like Pandora or Last.fm, etc..? You'd have to stream it over the air in order to listen to it. Yuk.

Nope. Rhapsody already has the Rhapsody-to-go service. For $15/month you can drop all you can fit onto a portable device. As long as you keep paying the monthly fees you can keep listening. At least once a month you have to resync the licenses to the device, otherwise the tracks become unplayable.

Originally Posted by tjs

I purchase my music via iTunes but have yet to buy a movie or TV show. I've rented a number of movies, but am waiting for TV episode rentals. I would be much more inclined to rent a missed TV show for 99 cents than to have to purchase it for $1.99 or $2.99 just to watch it once.

Which is exactly why I doubt TV shows will ever be available for rent. Nobody's gonna pay $2-3 to own a show they'll only watch once when they can pay $1 to watch it that one time. One could argue they'd get more revenue if they did allow rentals, but I'm not sure. I've bought a few $2.99/show season passes for shows I probably won't watch again. If I could've had Grey's Anatomy for $15 instead of $40 this year, I'd have definitely done that. That's $25 less revenue.

As I've said here many times though, even though I'll probably never watch these shows again, $40 is still far more economical than paying for cable!

[SpamSandwich]

I would have paid gold to sit in on a negotiating session between Jobs and the labels. Genius like that doesn't come around often.

[rain]

Originally Posted by Johnny Mozzarella

What's a "Tim Horton's" franchise?
Is that like a Ponzi scheme?

It's a multi billion dollar coffee/donut chain here in Canada and part of Canadian culture.

[Gandalf the Semi-Coherent]

Originally Posted by Virgil-TB2

This is like taking the opinion of someone opening their first Tim Horton's franchise on the state of the Food and Agriculture department.

I love Tim Horton's. Makes me want to become a Canadian.

--GTSC

[auxio]

Originally Posted by Rot'nApple

I hope you are right. My music tastes are limited. Even from the artists I enjoy, I don't care for everything they create and produce.

I would hate to pay a larger subscription fee each month for the occasional .99¢ song I want to purchase every now and then.

I guess it all depends on how the rental/subscription service works.

I was envisioning that you'd be able to pick a particular number of songs per week/month to put into your rental "window" and pay a flat rate for those songs which is cheaper than buying the same number of songs over the same time period. Obviously, allowing for people to choose different options for the number of songs and the time period in which they can change the songs.

[whatisgoingon]

Originally Posted by AppleInsider

...While Apple has finally agreed to variable pricing to score its goal of DRM-free music, other battles could still loom ahead. In today's New York Times report, many executives say the future of music buying will be monthly subscription fees to vast catalogs that could be heard on customers' mobile phones...

The only group actively clamoring for a subscription service are the labels. For them, the subscription service is a gold mine, because then:

1) they get regular, periodically increasing, never-ending payments from customers
2) they have less work to do, to fudge the numbers over which band should be paid how much for any given month.

Their only issue will be how to split the monthly fee between the major labels, and how often the split gets reviewed.

[PXT]

The RIAA watched a generation grow up believing it was ok to steal their music. Thanks to Syeve Jobs, many people do actually buy their music. The RIAA just dont get it.

[mdriftmeyer]

Originally Posted by paxman

It works with video because no-one want s to own videos. OK OK, some do but I can not understand why and for the most part people don't (except for Kid's vids, of course). Video's and movies are usually watched once only so a subscription makes sense. Music is different. Much more personal and listened to over and over.

As for paid promotion on the iTunes front page - all power to Apple. I am not sure how long they can remain in control of that element but I hope the record companies never will gain control. Let them have a link to a clearly labelled 'Promotion's page' where they can battle it out.

I agree that lots of people don't want to own digital copies of videos on hard drives, and mail order videos is replacing those who never bought copies of DVDs while at Blockbuster or WalMart. NetFlix effectively supplanted the store rental market. That's it.

Per video vs. Per audio is no comparison in overall size. Movie collectors are especially aware of this obvious conundrum and buy DVDs/BluRay discs. More to the point, DVD/BluRay copies are far richer in materials than just a digital download.

However, most people don't want to watch the same movie, over and over again, or they'd buy it. The drive to "own" your music is the reason the subscription model fails and Apple realizes that even if the quality of audio isn't flawless people who are musicphiiles [different from audiophiles] want to own their music via a per song, per artist and per artist album set of choices, without DRM.

[Esteban]

Originally Posted by elliots11

I'm glad they got a DRM free deal worked out, but it's like these music industry guys keep coming to Apple with the worst ideas in the book. I wonder if they're serious about them, or if they just know that Apple won't bite, and they do it to have leverage against Apple's wishes.

I'd say no one could be that far out there and still run an industry, but they've lost billions, so maybe they can.

The reason that they have so many bad/failing ideas is because they are blinded by greed and control issues. If the report is accurate, Jobs is completely correct:

"In July 2007 Sony head Sir Howard Stringer reportedly characterized Jobs as a "greedy" hypocrite who was accusing the labels of being overly interested in money while at the same time trying to funnel money only to his company."

And while I'm reluctant to be a obsequious Jobs apologist/defender, Jobs knows that the only way you deal with someone only interested in money, is through money- the "universal merit system" of capitalism. Since the labels have had no vision whatsoever about digital music, who could blame Steve for pointing out that they were clutching so tightly at their precious nickels, that they couldn't grab the dollars floating in the 3G spectrum all around them.

[Esteban]

Originally Posted by Virgil-TB2

I love this part:


As if a young thing like Lily Allen, working on her first album has any real insight into the "music business" (or business in general.)

This is like taking the opinion of someone opening their first Tim Horton's franchise on the state of the Food and Agriculture department.

That's funny, but I would disagree to a certain extent. You learn a lot about how things really work in the music industry by actually participating in it. Granted, her comment was probably a taken-out-of-context regurgitation of something someone like her manager told her.

[quinney]

Originally Posted by SpamSandwich

I would have paid gold to sit in on a negotiating session between Jobs and the labels. Genius like that doesn't come around often.

Good idea. They should record it and make it a paid podcast on the iTunes store.
I wonder if the negotiators for the labels would want to endure the humiliation
to get their share of the revenue.

[groverat]

What would Lily Allen know about the record industry? It's not like her father is Keith Allen or anything…

The RIAA watched a generation grow up believing it was ok to steal their music. Thanks to Syeve Jobs, many people do actually buy their music. The RIAA just dont get it.

My god, the Steve Jobs Christ complex is suffocating.

[Foo2]

What exactly of significance was negotiated here that's in Apple's favor? We have Apple yielding to the music industry by providing variable pricing, while removing Fairplay DRM which Jobs said Apple didn't want to use but which actually would seem to have benefited the company by driving iPod sales. From this article, it seems Apple was the entity pushing for DRM, to be used as leverage against the music industry to maintain fixed pricing. Apple finally decided to drop its DRM and deploy variable pricing.

[arteckx]

Originally Posted by Foo2

What exactly of significance was negotiated here that's in Apple's favor? We have Apple yielding to the music industry by providing variable pricing, while removing Fairplay DRM which Jobs said Apple didn't want to use but which actually would seem to have benefited the company by driving iPod sales. From this article, it seems Apple was the entity pushing for DRM, to be used as leverage against the music industry to maintain fixed pricing. Apple finally decided to drop its DRM and deploy variable pricing.

They used not licensing FairPlay DRM as leverage. They essentially said that they were not making FairPlay any better, so it would be in the labels best interest to agree to remove DRM if they want customers to have flexibility. If the customers can't get the must they want easily and with flexibility, they'll just download songs illegally instead of buying.

But, I don't think iPods are a big part of the equation here. They stand on their own as a good music player. Some people have other players though. Now they can buy music on iTunes without a big problem (even if it's not quite as streamlined as with the iPod). Also some people with iPods would not buy from iTunes because they wanted DRM-free music that they could put on their iPod, but also use for projects and the like without having to burn and reimport or strip DRM. Apple allowed variable pricing to get the DRM-free music which should lead to the iTunes store doing even better. They're counting on the majority no running off to buy a Zune to use with iTunes now.