While Apple's iPhone division basks in the glory of the media spotlight, the Mac-maker's iTunes division is baring the brunt of some potentially game-changing news.
News reports claim that ongoing tension between Apple and Vivendi SA's Universal Music Group could lead the latter not to renew its long-term contract to sell digital music downloads at the iTunes store. Other reports indicate that Universal is merely considering the notion.
Neither Apple nor Universal could immediately be reached for comment, but industry analysts said there's too much at stake for both sides not to continue discussions. "I can't see how it would be to either company's advantage not to maintain this relationship," said Tim Deal, a senior analyst with Pike & Fischer. "I'd be hard pressed to think the companies wouldn't resolve these issues."
Apple and Universal Music
Indeed, it seems Apple and Universal need each other in the digital music world. According to Nielsen SoundScan, iTunes would lose its right to peddle one out of every three new songs released stateside if Universal pulls the plug. On the other hand, if Apple decides to turn its nose up at Universal, it would eat into Universal's revenue stream. Universal generated more than 15 percent of its first quarter revenue -- more than $200 million -- from digital music, and iTunes is its biggest outlet.
Apple has a little more at stake in the wake of its much-hyped iPhone release. Part of the iPhone's appeal is the iPod inside that syncs with iTunes. Playing to its marketing strengths, Apple is requiring iPhone customers to activate their new handsets using iTunes software. Of course, while those customers are already using iTunes, they can shop for music to fill up the new smart gadget.
But those customers might soon miss out on Universal's artists, such as U2 and Amy Winehouse. News reports claim that Universal would sell its music to Apple on its own terms, taking down songs from iTunes on short notice, and at will, if Apple won't relent on the pricing structure or other demands.
Universal could be cutting off its nose to spite its face if it shuns Apple. The iTunes store accounts for 76 percent of digital music sales, according to NPD Group. Universal could of course try its luck with other digital music outlets, such as Napster or Rhapsody, but it could see that $200 million shrink by 76 percent without Apple.
Analysts have said that $200 million today will grow to much higher volumes in the future. NPD reported that digital music accounts for 13.8 percent of total music sales, and that number is increasing.
"iTunes clearly needs Universal's content in order to remain a viable force in the market. It needs variety. It needs volume. So maintaining that partnership is important for iTunes and equally so for Universal," Deal concluded. "There's probably a thousand alternatives to digital distribution, but the preeminent force in digital distribution right now is iTunes, as far as legal downloads go."