Universal Music could be about to spark an online music war, trying to bring down iTunes with the same tactic that Apple has used, giving away music for a low price or for free, and charging for the player. One scenario discussed this week as newspapers have revealed talks led by UMG is of taking around $100 for each device sold, in return for a free music subscription for the lifetime of the device.
While such a move might halt iTunes growth, and perhaps turn the tide on iPod sales, it would also lead to legal actions based on anti-trust legislation, and most favored nation clauses at other music stores.
The iTunes Music Store launched in May 2003, so how come it is only this week that the Universal Music Group decided that Apple is now the biggest threat that it faces, and begin efforts to build its own store?
Is this even an attack on Apple, or could it just be a sign of the times, and Universal feels that it needs to position itself for the huge ramp up on music phones, and take back control of the asylum, and assert control once more over music pricing and try for a market share increase in the online world? And although no-one has said it yet, handsets could be offered using the same approach.
UMG is the largest CD seller in the entire music world, and as such it controls more music, but it has complained, along with the other labels, long and hard, that it needs to charge more for new releases, and less for older music, and it needs to push albums, not singles and that has built up resentment with Apple’s iTunes store.
Is it better for UMG to do its own thing, while leaving iTunes more or less untouched for now, still able to sell much of its wares, or should it have behaved more like its once sister company, the errant NBC Universal, which has pulled video content from iTunes for more or less the same reasons, as well as launching its own service.
Universal Music in July confirmed that during its renewal talks with iTunes it wanted to be able it to strike exclusive distribution deals with other digital music providers for individual artists or tracks, though it will continue to sell music through iTunes and that led to a slight change in terms with iTunes.
But just how would UMG take a greater market share if it partners with the usual suspects, such as Sony BMG and Warner Music, and offers just the same tracks which Apple is selling. Presumably each company on this new service could create their own offers, bundles and special promotions, just as they can in the existing CD retail markets (but not on iTunes).
But we think that the labels just haven’t thought this through. If they act in concert in order to dent or damage Apple market share, or deprive iPod customers of getting music to their devices, they will be in immediate hot water, with anti-trust cases slapped on them from both sides of the Atlantic. They are no strangers to this type of move, and have been accused in the past of anti-trust, but have always been careful enough to operate together in small groups, never constituting more than half of the market and have escaped any punishment for fixing prices and controlling routes to market.
But it seems far from co-incidental that this step is being made at a time when some top rock bands are jumping on the DRM free music banner, and also bypassing ALL the online stores out there.
The recent move by British supergroup Radiohead, to offer its music from its own web site for ‘whatever the customer thinks it’s worth’ and the idea of Prince to give away a brand new CD within a newspaper, in order to promote live shows, are all likely to be copied. Already the Charlatans, Oasis and Jamiroquai are all known to be between labels, and thinking about doing the same thing as Radiohead.
What is interesting is that this achieves exactly what the record labels want, separate pricing for each band and each music format and differential pricing for new and older music.
What is to stop Music Labels trying the same kind of move? Simply drop their brand to the back, and push forward the brands of the bands they have signed, and drive music through the band’s own web sites. This would be very different from what Radiohead are doing, because it would mean that the bulk of the money would go to the record label, not the band.
But it would recognize a couple of things about piracy, namely that pirates feel comfortable ripping off a big nameless corporation but not the artists themselves, and that it is bands that have brands, not record labels.
There would need to be a mechanism for delivering a huge amount of music, so a music store of some description would need to sit behind an approach like this. But we don’t expect that suddenly after 7 years of continuous piracy that the record labels have finally ‘got it’ and are capable of coming up with a plan like that. Instead we would expect their combined store to be iTunes with differential pricing, badly implemented, with Windows Media DRM, meaning that the music is limited to devices which are based around Windows as well as those that have ported Windows Media DRM or the new PlayReady DRM (Nokia handsets will shortly have this).
What exactly do the music labels get here, over and above for instance the Nokia Music Store, which has just been launched and which complies with many of the things they want. Nokia has unified pricing to the point where every track is €1, but before they bought Loudeye, which in turn had bought OD2, which the store is based on, pricing was set by the labels. But it also offers a subscription service at €10 a month, which is the type of service that the labels are now thinking of introducing, except far cheaper.
When talking to Nokia’s DRM supremo Sebastian Nystrom, at World Broadband Forum last week, we asked if the Nokia store would be accessible to non-Nokia handsets, and he replied ‘Of course.’ Which means that both handsets and on MP3 players which run Windows Media DRM or PlayReady will be able to play tracks sent from the Nokia Music store. So there is a case to make that the vast music volumes that are going to be shifted from new mobile phone music stores are evolving to the type of store that the labels would now introduce.
But instead, if this development goes ahead, under the new banner Total Music, it would set up a rival to stores of that type ‘ and when a major market supplier begins to compete directly with its existing routes to market, offering the same terms, it is always a sure fire way to get into legal trouble. The first time it ever offers a lower price than its partner stores are allowed to offer, or gets earlier access to a freshly released track, everyone will complain.
Realistically UMG needs to keep out of the online store business and promote the creation of more stores from more sources ‘ how about Motorola, Samsung or Microsoft itself.
But the early reports are that the deal will go a lot further than reaching out to the market with parity, and some reports have suggested that a certain amount of music will be completely free of charge with each player, and the service would become integrated on them. This would be facilitated perhaps by taking a percentage of the device sale, which is something that Universal began when it cut its first deal with the Microsoft Zune last November.
Universal gets around $1 for each $250 Zune device which is sold. If every major record label took the same amount they could be collectively getting 2% to 3% of the value of the device, and as much as 6% of the amount that Microsoft gets paid by a retailer. But of course that deal didn’t pan out because so few Zunes were sold, and now Universal has to perhaps ask for a little more cut, and in return offer 6 months or a one year free subscription to Total Music with each device.
But actually it could go a lot further. UMG is supposed to be considering bundling a subscription for the lifetime of the player, and taking around 18 months of subscription costs out of the hardware sale. The rationale is that they would charge as little as $5 a month for 18 months and get it all paid up front. The hardware could be reduced in manufacturing cost to accommodate the new business model, slightly less storage, less battery life etc’ and it could be made to fail at 18 months, so that people need to buy a new player, using planned obsolescence.
If the music labels go that far and are successful, then perhaps this is the first time anyone has fully understood that iTunes is all about paying for a nice expensive player, and getting the music cheap or free, and will have copied the deal.
The headlines might read that the monopoly PC supplier (Microsoft) had conspired with the monopoly music suppliers (UMG and friends) to cut the monopoly MP3 supplier (Apple) out of the business. It would be a pretty huge legal action ‘ given the hole it would make in the $146 billion Apple share price, if the plan worked. We think even free music would not dislodge Apple from its iPod leadership position though.
Talks on the creation of Total Music were reported by BusinessWeek, citing CEO Doug Morris as the architect of the move, which is supposed to be at an early stage, but this takes us back to the early days of online music and piracy, when Sony and UMG backed PressPlay while other labels created MusicNet. Both failed and were eventually sold.
After the Apple re-negotiation in July, UMG has been free to cut special deals and has offered deals with cellular operators for ringtones, and tests with Wal-Mart, Google and others for DRM free music.
Faultline Comment
Our own opinion is that this UMG service will never get past the corporate lawyers, and it will be watered down and eventually become just another small music service if it gets launched at all. A move like this to marginalize Apple, if successful, could shave more off the share value of Apple, than the entire UMG valuation, and if this was deemed to be illegal, all of that could be forfeit in a successful anti-trust move.
Meanwhile Snocap, the P2P music service run by the founder of Napster, Shawn Fanning, has cut 60% of its staff because music sales were not ramping fast enough, and the company is hoping for buyers to emerge. Ironically Snocap has eschewed the business model of offering online music, and instead is focusing on what Radiohead has just done, helping artists set up their own online stores.
Just over a year ago Snocap cut a deal to sell music on MySpace.com allowing not so famous bands to sell music for whatever price they wanted, and Snocap said it has more than 175,000 registered consumers, and over 80,000 artists who have created their own storefronts, but revenues clearly aren’t high enough to make it self sustaining.