TRYING TO GET A BITE OF THE APPLE

Posted by | June 1, 2010 | 16,342 views

Last week brought good news and bad news for Apple. First the bad news: the US Justice Department began an inquiry into Apple’s dominance of digital music. The good news is that Apple has now passed Microsoft to become the second most valuable company in the US, surpassed only by Exxon-Mobil. But this also plants a nice big bulls eye on the company’s backside.

The trouble seems to have begun last fall when Apple tried to strong-arm the record labels, specifically Sony and EMI, into not participating in Amazon’s special Daily Deal promotions where the featured album usually sells for the low prices of $3.99-$5.99, as opposed to the almost standard $9.99. The DOJ seems to think that any attempt to discourage labels from participating in the Amazon promotion might be construed as price fixing. Apple accounts for almost 70% of digital music sales and is now the number one music retailer in the US with slightly under 27% of the entire market.

Now you can certainly imagine that the record companies are more than happy about this little turn of events. They have long complained that Apple had them by the balls and were throwing their weight around. Rumours are circulating that Apple is telling the record labels that they will not pay them any licensing fees for their upcoming new cloud service. (For a detailed analysis of cloud services, read:   ‘Climbing Higher Into the Clouds’ .) We all know that if anybody is going to be strong-arming anybody else, the record labels want to be the ones doing it.

But the labels are now facing a bit of a conundrum. In spite of their complaints about Apple, they also have always expressed fear that other digital music models might “cannibalise” their iTunes revenues. And if you’ll recall, it was the labels that for years were bitching about variable pricing until Steve Jobs finally threw them a bone in exchange for offering non-DRM’d tracks. The DOJ is looking at Apple as a monopoly and they don’t like it when monopolies keep prices high.

There was a similar case in the ’90s when the US and EU went after Microsoft for using their platform to gain competitive advantage in the browser wars. Even though Microsoft settled after years of litigation, they still maintain a dominant browser market share.

So what would happen if the DOJ decides to move forward with a formal investigation and perhaps legal action? More than likely the government might force Apple to open its iTunes platform to competitors like Amazon and even Spotify, thinking that by doing so, competition will drive down prices. Digital sales have reached a plateau and although Amazon have increased its market share from about 8% to approximately 12%, it’s been at the expense of other services, not Apple. But God only knows how long this will take, and will competing services who don’t have the staying power of an Amazon be able to hang on long enough to benefit?

Realistically, things won’t change much. Just as with the browser wars, Apple will maintain its dominant market share and a few others will be left to fight for the scraps. And what’s curious is that the record labels will probably be satisfied. The DOJ busts monopolies in order to get prices down, and that really doesn’t align with the labels’ interests. God forbid that prices come down. That would just fuck up everything.

ALSO READ:

The Ongoing Devaluation of Music

Does EMI Make a Good Fit for Sony Music?

Music Platforms and Fan Engagement

Apple iTunes Entering the Music Subscription Market

Digital Music Trends Podcast

Copyright Is So Damn Annoying

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Posted by on Jun 1 2010. Filed under Business Models, Digital, featured. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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