Universal and Apple Argue Over ITunes and IPod

Steve Jobs will soon have to make a decision about the future of iTunes as Universal has decided not to renew its contract with Apple based on its desire to restructure some of the nuts and bolts of the agreement between the music company and the tech titan. Up until this year, Apple and Universal, a subsidiary of Vivendi SA enjoyed a cordial relationship between mutually benefiting parties. That soured recently as Universal has decided to discontinue its current arrangement and move to an 'at will' contract with the iTunes and iPod maker.

Apple which is based in California and Universal have enjoyed a three year relationship that began in 2004 with a two year contract. That contract was followed by a one year agreement. It had been the hope of Apple and CEO Steve Jobs that the deal for Universal to provide music for the iTunes Store would continue with a new two year agreement. That hope was dashed as Universal has decided that it cannot continue the agreement the way it now stands.

Universal is holding out hope that it will be able to enter a new, more favorable deal with another media player company in the near future. The question that arises is if Apple and iTunes hold over 75% of the market, who else would they want to do business with. There is no question there are other players but will consumers drop their iPods and iTunes in favor of Microsoft and its Zune player?

With over a quarter of the market share, Universal has such staples as U2, Bon Jovi, and Jay-Z. Against that backdrop, Apple consumers purchase over three quarters of all digital music purchased. Today, they are the third largest seller of music behind Wal-Mart and BestBuy respectively. Universal will be hard pressed to find another partner to work with as Apple has recently released the iPhone to go along with the iPod that plays the music consumers purchase at the iTunes store.

The disagreement between the two companies stems from two separate issues. Today, a consumer can buy any song for the price of $0.99. Universal wants to table that and move to a scaled price structure where older songs are cheaper while newer, hit songs have a premium attached to them. This debate has gone on for some time and seems to have come to a head with the recent negotiations. The second issue between the two companies is that Steve Jobs and Apple refuse to modify the code inside the iPod and iTunes. Currently, you can only purchase iPod compatible songs via the iTunes website. In the same way, you can only use iTunes purchased songs on the iPod player. Music companies compare such treachery to a monopoly. Which may not be much of a reach.

With the new terms Universal will be able to pull a song or all its songs from the iTunes services in a short period of time. Similar to, at our convenience, Universal is banking on Apple caving in and going with the terms Universal proposes. Such a gamble could prove futile. If Steve Jobs chooses to play the waiting game, Universal could find itself out in the cold and its music falling to piracy or other illicit digital rights. Consumers will not be willing to pay $0.99 for a Coldplay song and $4.99 for the latest U2. Such logic will be proven murderous to Universal's bottomline. Sales of digital music through iTunes and other sources accounted for more than 15 percent of Universal's worldwide revenue in the first quarter, or more than $200 million. (Vivendi does not break out revenue from Apple alone.)

It will be interesting to see Steve Jobs' response to Universal's decision. He is not much for being bullied just ask the folks in Redmond, WA called Microsoft. At some point, Universal will recognize that it needs Apple and Apple will see that iTunes needs Universal. And from that point, a deal will be made for all to benefit.