Doug Morris is supposed to be the music industry's hard-liner.
The chairman and CEO of Universal Music Group, Morris yanked music videos off Yahoo and sued MySpace for copyright infringement. He threatened to pull songs from Microsoft's online music store unless Bill Gates forked over a $1 for every Zune music player sold. He seethed over Apple CEO Steve Job's refusal to let him and the other label execs set song prices on iTunes.
So why is he now offering Jobs a plum of a deal?
Morris has approached Apple with an idea to offer a device that comes preprogrammed with Universal Music's entire library on it, sources told CNET News.com. A music industry source said Wednesday night that Apple has broached the idea of bundling music with the other three major labels but didn't show much enthusiasm for the plan. "Apple was just inquiring about whether this kind of thing would interest (the other record companies)," said the source.
It's clear now, two days after The Financial Times broke the news about the Apple-label discussions that Morris, not Jobs, came up with the idea.
Insiders say Universal Music, whose artists include U2, DMX, and The Killers, wants to pump life into subscriptions, and is tired of seeing Apple selling songs cheap and making fat margins on the music players. Not surprisingly, he wants a slice of device sales from any gadget maker that licenses his music. Morris also has ambitions of turning Universal Music into a total entertainment company.
The plan now is to "partner instead of just being a vendor," a source close to the label told News.com.
Universal revamping strategy
In the proposal Universal Music pitched to Apple, the device would come with all-you-can-eat music for a period of time, perhaps a year, and then owners would be "rolled over into a subscription service."
Label wants to breathe life into subscription services
(Credit: Universal Music Group's Web site)Subscriptions services, such as Napster, Yahoo Music and RealNetworks' Rhapsody are dwarfed by Apple's download store but are still very important to executives at Universal Music, say insiders. They see it as a way to get people to keep paying for music and to keep tabs on what audiences are listening to, sources say.
Universal Music was a big backer of an ISP tax, according to reports. And last October, BusinessWeek reported that Morris had also toyed with the idea of enlisting the other three majors to create a music-subscription service. The plan seemingly was derailed when the U.S. Justice Department began investigating whether such a consortium would violate antitrust laws.
"These guys at Universal," said one music insider, "are so obsessed with this subscription thing...but there are publishing issues involved with bundling and I don't think they make much money off it."
What can't be overstated is Universal Music's desire to get a taste of device sales, insiders say. Back when Apple's iPods became the rage, everybody in the music industry realized they missed an opportunity. While Jobs made pennies on song sales at iTunes, he pocketed 50 percent profits on some iPod models, according to estimates by iSuppli.
It's safe to say that almost all the major players in the music industry see that as unfair. They argue that what people want isn't a music player. It's the music.
That's why Morris went after--and got--a share of the Zune as well as devices offered by Sirius Satellite Radio, XM Satellite Radio and Nokia.
The FT reported that Morris wants $80 for any Apple device bundling Universal Music songs, while Apple has offered $20.
Getting a share of music players is smart, said Forrester Research analyst James McQuivey, even if it is late. But he warns that whatever gains the labels make on device sales, they could lose in other areas. Allowing Jobs to place their music catalogs on a single device might allow him to offer a breakaway handheld that could overshadow any other gadget or music service out there.
"The labels would just be turning over their music to another Apple-only environment," Forrester Research analyst James McQuivey said. "Nobody would want anything else."
"This kind of offer would kill CD sales far more quickly," McQuivey said. "You'd be giving people that typically buy music a reason to quit buying. Besides killing off CD sales, the music industry would harm two areas that are going strong for it right now. One is MP3 sales and the other is the (free streaming) music offered by social networks Imeem and Last.fm. If I were the music labels, I would tell Apple to come back in 2009, after I've given these other services opportunity to grow."
Apple is in for a fierce legal fight should it ever release a device that offers all-you-can-eat music, according to David Pakman, CEO of rival digital music service eMusic.
"It smells like classic Sherman Antitrust Act to me," Pakman said. "I only know what I've read but the plan sounds very similar to the tying practices Microsoft used with Windows/Explorer. And Microsoft is still paying the penalties for that one."
The Financial Times reported Tuesday that Apple is in talks with the four largest record labels about offering a device with access to the entire iTunes music library. A source close to the negotiations confirmed the report in an interview with CNET News.com and said the offering would be free initially but device owners would later be charged subscription fees.
The talks are preliminary and no agreements have been reached, the source said. That hasn't stopped some of Apple's competitors and antitrust lawyers from sounding alarms.
Pakman says Apple is following Microsoft's lead. In 1998 the U.S. Department of Justice filed a lawsuit accusing Microsoft of monopolistic practices by bundling Internet Explorer with its Windows operating system. The case was settled in 2001. In that case Microsoft had monopolistic position in operating systems with Windows, the government charged. The company achieved dominance in browsers by forcing Windows buyers to use Microsoft Explorer.
The parallel is that Apple is forcing people who buy this device with preloaded music to buy its music, Pakman argues.
An Apple spokeswoman said the company doesn't comment on rumor or speculation.
Critics say that Apple, which sells 70 percent of all digital music devices, could use its overwhelming market share to wall out competitors. No other music services--download or subscription--could sell songs to such a device. Music listeners wouldn't need to get their music anywhere else. Competition among digital music retailers would suffer, said Pakman.
Such a plan "would produce a long and drawn out fight in both the U.S. and European courts," Pakman said.
What's the difference between a device that bundles music and the relationship between iTunes and iPod? Weren't they tied together?
The answer is yes and they have been challenged in U.S. and European courts. A year ago, two separate lawsuits, which have now been consolidated, accused Apple of unfair competition, maintenance of a monopoly power and "unlawful tying." That case and a similar one, Black vs. Apple, are pending, according to documents Apple filed with the Securities and Exchange Commission.
In France, a consumer group has alleged that Apple has violated that country's consumer laws by failing to mention that the iPod is "allegedly not compatible with music from online music services other than the iTunes store" records show.
Maxwell Blecher, an antitrust expert with the Los Angeles firm of Blecher & Collins, agreed that Apple could face legal challenges for bundling if other music vendors are indeed prevented from distributing songs to such a gadget. "Apple is going to argue that they compete with lots of other similar devices," Blecher said. "You have to look at whether there are exclusionary aspects or conduct. In that debate lays the outcome of any lawsuit."
Universal Music Group has already signed a deal with Nokia to enable buyers of some of its devices to gain access to all of Universal Music's library. The music industry source said that UMG is in talks with several other handheld manufacturers as well. But no handheld maker has struck a deal with all four of the top music companies. Apple could be the first.
But just because smaller players in the market may have similar deals may not be enough to prevent Apple's deal from being challenged, said Blecher.
"When Apple came out with the iPod, only Apple could deliver music to it," Blecher said. "They accused Apple of exclusion. When they did the iPhone, it was impossible to shift to other carriers. They said that was exclusionary...any time you have high market share and restrict competition in any way, you're going to raise antitrust concerns."
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