Apple likely to lead music negotiations

Sony BMG, Universal, and Warner will attempt to drive contract renewal negotiations with Apple toward variable song pricing, a subscription service for iTunes, and bundling more music alongside other features into digital packages, according to Reuters.

Music companies are also likely to jockey for improved margins on digital tracks, and may ask for or demand a slice of iPod sales by pointing to Microsoft's agreement with Universal last November. The Redmond-based company, which had recently begun selling its new Zune portable media player to combat Apple's market-leading iPod, agreed to pay Universal a royalty fee for every Zune player sold.

"We felt that any business that's built on the bedrock of music we should share in," said Universal chief Doug Morris.

The deal was not directly linked to content shipped with the Zune, however, as the device's preloaded music was provided through music labels with no clear connection to Universal. The label also refused to license its content to Microsoft's Zune Marketplace online store without those royalties, demanding compensation above and beyond direct music sales -- regardless of whether music from Universal is ever copied to a Zune.

Morris boldly implied that all non-Zune owners thieves, and hinted that he would press for similar terms with Apple as well as other online store owners moving forward.

"These devices are just repositories for stolen music, and they all know it," Morris said.

Apple, however, still maintains the upper hand in negotiations with its dominant position in the industry. Last week the Cupertino-based company announced that it had sold 100 million iPods since it introduced the portable player in 2001, and is currently responsible for more than 80 percent of all digital music download sales in the U.S.

Still, pressure continues to mount overseas for Apple to open up its iTunes music to competing players. That movement, led by Norway with backing from countries such as France, Germany, Sweden, and others has threatened Apple's ability to sell music in those regions. Norway has already declared Apple's closed system illegal, and has provided a deadline that it says the company must abide by.

France drafted a law which would have prevented iTunes from selling FairPlay-protected tracks in that country, but the bill was watered down sufficiently to pose no threat to Apple before it eventually passed and took effect.

Some music industry watchers point to Apple's proprietary FairPlay DRM (Digital Rights Management) as the key issue, noting that the record labels don't necessarily need to remove DRM completely but that Apple can open up its closed standard by allowing competing devices to play FairPlay-protected tracks.

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

The other three big music labels are experimenting with DRM-free tracks, but privately admit that following EMI is just a matter of time, according to Reuters.

"If Universal goes, then everyone has to follow," said the anonymous music executive. Cohen speculates that Sony BMG, Universal, and Warner Music will carefully watch the outcome of EMI's DRM-free offering.

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