Apple With Upper Hand In Negotiations With Record Labels

04.20.07 - 12:33pm

CD sales lost over 13 percent of their revenue in 2006, and digital music sales jumped 60 percent, with album sales up 103 percent. This puts record companies in a bit of a rock and a hard place in upcoming negotiations with Apple over music contracts coming up this next month. With such an exorbitant loss of music sales, record companies need to find a way to make money selling the music digitally. With Apple controlling over 80% of a market that the record labels desperately need, the record labels may forced to play into Apple’s hands when the contracts hit the tables

Apple clearly will be fighting for DRM free music and since EMI has already signed up to have all their music DRM free the record labels hands have already been called, without even getting a chance to fight for Apple’s Fairplay to be opened up with DRM still in place.

“EMI rushed into that deal,” says Ted Cohen, who left a senior position at EMI last year to set up consulting firm TAG Strategic. “It would have been better to put pressure on Apple to open up FairPlay to make it interoperable across multiple platforms.”

“I have a strong feeling there’s not going to be a move for at least 60 days by any of the other majors,” he said. “If all of a sudden EMI starts increasing market share in digital sales over that period, then they’ll have to act.”

Cohen also added that “If Universal goes, then everyone has to follow,” and there has already been talk of Universal signing a deal with Amazon to sell DRM free music that may be announced in May.

Record companies will try to get Apple to pay a royalty fee for every iPod sold similar to a deal they made with Microsoft’s Zune. “We felt that any business that’s built on the bedrock of music we should share in,” said Universal chief Doug Morris. Analysts, however give little hope to the record companies in aquiring this as EMI’s deal has taken away some of their negotiating power.

Lastly the record companies are likely to push for a subscription service through iTunes similar to the RealNetworks Inc.’s Rhapsody service. “The record companies like the idea of the recurring revenue,” said Gartner analyst Mike McGuire. “The challenge will be to convince Apple that it’s worth the extra costs involved in setting it up.”

With the high interest in subscription music for MP3 players Apple may need to open up a subscription service to compete with companies such as Slacker coming out in June, which will be offering their own music player with $7.99 subscription fees for all the music you wish to download, as well as having a 3.5 inch screen and automatic recharging battery. Emusic competes with Apple as well and is second in digital music sales, offering a very successful subscription service, even without music from the major labels.

Category: apple, itunes | Tags: apple, cd_sales, drm, emi, music_contracts, record_labels