Universal Music vs. iTunes

We have been hearing about Apple and Universal’s tiff for a while now, and it now looks like Universal is actually trying to get other record companies to join it into creating an alternative to the iTunes music store. Business week has some details.

Some things from the article did jump out at me:

While the details are in flux, insiders say Morris & Co. have an intriguing business model: get hardware makers or cell carriers to absorb the cost of a roughly $5-per-month subscription fee so consumers get a device with all-you-can-eat music that’s essentially free. Music companies would collect the subscription fee, while hardware makers theoretically would move many more players.

This is an interesting model, “baking in” the price of the subscription into the cost of the player. This is actually very astute since Universal will get its $5 regardless of whether the consumer will use the service or not, and this money would come right off the profit margin of the device makers since I don’t see them raising the price of a $250 device to $255. The downside for the consumer is that they pay $5, regardless of whether they use the service or not, and they will still have to buy music that is not offered through the subscription package.

But before long, Morris realized he and his fellow music executives had ceded too much control to Jobs. “We got rolled like a bunch of puppies,” he said during a recent meeting, according to people who were there. And though Morris hasn’t publicly blasted Jobs, his boss at Universal parent Vivendi is not nearly so hesitant. The split with record labels–Apple takes 29 cents of the 99 cents–“is indecent,” Vivendi CEO Jean-Bernard Levy told reporters in September. “Our contracts give too good a share to Apple.”

Well if Apple gets 29 cents of the 99 cents, does that mean that the music company gets 70 cents? If so, I would say that this is a good deal for Vivendi since they only need to ship one unprotected copy of any tracks they sell to Apple. Apple still has to put DRM on the track, store it, and deliver it to the user. I wonder what is left out of the 20 cents Apple gets once it has paid for all that. What Vivendi does not mention either is that Apple has built a very effective delivery mechanism to the consumer, and with more than 300 million copies of iTunes and 100 million iPods out there, this is a lot of consumers for Apple to give access to Vivendi to.

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