Why Major Labels Continue To Be Apple’s Slave!

Posted by | May 25, 2011 | 8,583 views

It’s a well know fact that the major labels missed a massive opportunity when originally negotiating with Apple for the first iTunes music licenses back in 2002/2003. That opportunity was to ensure that an album could be sold in it’s entirety and not sold song-by-song if the artist so chose. The fact labels capitulated to Apple’s demands was what has most significantly led to a decline in album sales revenue for both artists and labels alike over the last 9 years.

Furthermore, the fact the label’s neglected to negotiate a royalty for every iPod sold by apple – much akin to the royalty labels were paid on blank CD’s is a serious miss-calculation which has had a negative effect on label coffers as well. Laughable as it is UMG via Doug Morris did manage to negotiate a measly $1 per sale for the flop that was the Microsoft Zune MP3 player. The key issue labels forgot to leverage was the fact that without music there would be no iTunes and subsequently for Apple no music playing hardware device sales. What has in effect happened is that music has become the loss leader to drive Apple hardware product sales (iPod, iPhone etc). And the recorded music business has been losing hand over fist in this scenario.

Moving on to the present day Apple has already been proved to use morally repugnant anti-competitive business practices when dealing with labels – prime example being when iTunes directly threatened to pull labels iTunes promotions if they continued to allow Amazon’s deal’s of the day promotions. TMV is in possession of an email forwarded from one major label digital head, which provides clear evidence of Apple’s illegal anti-competitive behaviour in respect of this particular event.

As the majority of the major labels have knowingly colluded in allowing Apple to launch it’s own streaming and cloud-based service before Amazon and Google little own Spotify – it is clear these labels are addicted to the iTunes monopoly of their industry. This monopoly alone where Apple has a minimum of 65% market share in legal download sales is surprising in the fact that competition authorities on both sides of the Atlantic have not acted to break up this monopoly.

Both Amazon and Google were pretty much left with no choice but to launch their music locker services without licenses from the major labels. It obviously became crystal clear that these same labels were giving Apple Inc more favourable business terms than those offered to Amazon and Google.
TMV asks what does such law breaking reliance on Apple actually do for the long-term benefit of the recorded music industry? In TMV’s view it is worse than the days of payola. If anything it just continually makes the recorded music business weaker and even more reliant on one retailer for more than 70% of its digital income whilst its physical retail product income continues to decline. Obviously, that is not good for the industry as a whole, artists or labels alike. Monopolies serve no industries long-term interests other than the actual monopolist itself.

The global digital music retail market is divided up as follows Apple/iTunes 70% (average global market share), Amazon 10%, and eMusic/Spotify about 5% with the remaining 15% left to over 500 different retailers fighting for peanuts! Whilst the major labels continue to prop up Apple/iTunes all they are in effect achieving is to become even more reliant on a monopoly. TMV believe some of the label digital heads have enough intelligence to understand that. So surely it is in these same labels interest’s to give services like Amazon and Google a level playing field to compete within?

In reality, no service competing with iTunes has been given viable terms to build a sustainable digital music retail business. No other business is provided with a 70/30 split in the labels favour – it’s more commonly 90/10. This in itself is quite frankly a market condition that needs to be urgently rectified. $0.99 is a fair price the music consumer is prepared to pay per downloaded track. However no business can survive on $0.09 per track before costs and marketing. Apple has previously stated it loses money on $0.27 per track that it makes. But as we all know that is a small price to play to ensure its mountainous profits from hardware sales.

It is sad to see the recorded music business continually making itself weaker due to inept decision-making at the top. If the labels were to do some real research they would realise that consumers don’t just want platform such as iTunes in fact many consumers actually detest iTunes.

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Posted by on May 25 2011. Filed under featured, Labels. 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.

7 Comments for “Why Major Labels Continue To Be Apple’s Slave!”

  1. A very illuminating article, that points out yet again the naivety and stupidity of the major labels…it’s their funeral

  2. pg

    great piece

  3. wallow-T

    It may be that the interface between portable user device / personal computer / download store is so complicated that it is a “natural monopoly” like a public utility company.

    As I have written before, Apple won this war by providing seamless delivery of paid content. Before iTunes, nothing else worked reliably, and no seller took responsibility for the total customer experience. (Microsoft “Plays For Sure, “anyone?)

    On price alone, Amazon should be killing Apple with their download specials. But with the Amazon store, you need a special download tool, then you have to drag the files around. That’s too complicated for a good chunk of the market.

    Maybe direct-to-handset Over The Air downloads, eliminating the personal computer in the middle, will improve sales for non-Apple stores?

  4. Digital Guy

    I hate to say, but this article sounds like a lot of Monday morning quarterback whining. The music industry’s arrogance and complete lack of willingness to listen to the information technology in the late 90’s foreshadowed their decline. In 1998-2000 they never made more money from the sale of CDs (remember, those where the “heady” years of Napster, which the labels put out of business in the beginning of 2001). Rather than understand the consumer’s demand for access – and build an online model exploiting that demand for availability of all music – they went off and built their siloed digital online offerings with heavy DRM (e.g., PressPlay). Of course, they failed.

    The labels were simply unable to get away from attempting to duplicate the temporary polycarbonate windfall (i.e., stamp out pieces of plastic and load them on trucks at a cost of $.25, and, magically, at the other end they become “worth” $15-20.00). You are correct that the sale of digital singles has been the primary cause of the decline in label. This is no surprise, as the labels attempted to shove down consumers’ throats albums with perhaps one or two desired songs on them, with the rest of the tracks undesired filler.

    The labels failed to see that Napster foretold a dramatic shift in their business model. Yes, infringing IP by unauthorized P2P is wrong. But the music industry blinded itself by focusing on defeating P2P by DRM and lawsuits – suing 30,000 of your potential (if not actually) best customers is not what I call good customer relations. The industry just didn’t want to see the handwriting on the wall.

    The handwriting wasn’t necessary all bad. I agree that selling the music piecemeal could be a bad business deal. But what the labels had in Napster (they figuratively had their hands around the company’s neck after the court decision) was what we now call a social network. There were 100 million unique Napster IDs when the court ordered it shut down.

    Imagine 100 million people passionate about music and interacting. I won’t bother the readers with the details of what might have been except for the following. Wildly high valuation for the record labels today is around $30 billion, the wildly high valuation of Facebook is $80 billion. Whatever your view of Apple and iTunes, it is truly sad that rather than taking the passion of music lovers and turning it into an experience that would have benefited consumers, and provided huge amounts of income from much more than piece sales of music, the labels wound up painted as anti-consumer – fairly or not.

    Finally, the idea of a tariff on digital goods for the “privilege” of playing music is a joke. Without devices to playback music, there would be no sales. One could make the same argument for a tariff on music to ensure there would be devices so consumers could buy music. It’s like saying the department stores at the mall should pay bus companies for delivering passengers to the mall. If record labels want to make money from devices, they should go into that business.

    Blaming everyone else, including Apple, for their fate is counterproductive. As Pogo famously said: “we have met the enemy and he is us.”

  5. G

    Boo hoo. Someone finally slaps the original bullies (major labels) around, and that makes them evil? Get a grip. And learn how to write, while you’re at it.

    CommonMan — Somehow, Apple, the media and all consumers are wrong, but the majors are right? Is that really what you’re saying? Laughable.

    I’ll be blacklisting this self-masturbatory website. Have fun.

  6. CommonMan

    Hello, you have touched on many things that is not being talked about enough. Apple, in its history, has never been good in the long-term for the ecosystem that it exploits – whether it is thousands of programmers not getting returns on their work for the chance to hit the lottery of a successful app, news media companies marginalized and like the music industry deprived of any pricing power on their own.

    The reasons for this are many and complex and it starts with the labels, who are no less arrogant than Apple when it comes to the end customers. The very mention of a cut of a blank CD in this column as if that was an acceptable thing for the consumer is a sign of the problem that Apple has used successfully.

    First, Apple portrays itself as the friend of the consumer battling the arrogant music industry and the attitudes of the media companies plays nicely into this. Unless the media industry changes to get some humility and customer friendliness towards their audience, they will continue to be exploited by the distribution channels, of which Apple has the upper hand now.

    Second, with the dominance Apple has now, music labels don’t really have the clout to negotiate. That is the simple answer to your title. If any label tries to hold out, they can be cut out significantly from the biggest market they have now to reach their audience. Labels cannot legally collude to hold out together, Apple lawyers will see to that. So Apple has the music industry by a part of the anatomy that is difficult for them to get out of.

    Third, the alternatives suck, not necessarily because of competing products to Apple. Google is extremely inept when it comes to business arrangements and worse when it comes to understanding copyrights. Its whole DNA is based on exploiting third-party copyrighted material for its benefit and just like Apple in the guise of helping the end consumer. Even if they could be deen as being careful about copyright, their execution in most products is always just 80%, they never seem to go the last step so they cannot compete with existing players (except by giving things away free or close to free). The free model does not work for media.

    Amazon is probably the best channel who is a pure retail play but without their own closed ecosystem of devices labels would be afraid of piracy (whether that is justified or not is a different debate).

    The only way out of this is for Labels to take the initiative to figure out how they want to bring music to their audiences that makes it convenient for the end users, give up the fantasy idea that if they restrict supply artificially, people will pay multiple times for the same music, pro-actively encourage people to buy and consume it wherever they can on multiple devices (the same way Netflix is doing which is why Apple will have a tough time dominating the video market). But label management just don’t know how to create a mutually beneficial relationship with their audiences.

    The real solution is for more and more musicians themselves to give up on the labels and seek alternative means to get into people’s devices. Unless, you are looking for the top 10 charts and promotions, labels don’t do much for most musicians and have lost a lot of money for them in the last decade.

    Apple will probably take over many of the functions of a label in the near future anyway including concerts and promotions.

  7. Chris Gilbey

    I remember being at a BMG international conference in the mid 90′s and there was a session on how we could sell more music. People suggested better videos, better cover art, better marketing etc, etc. Then Heinz Henn got up and said “you guys are missing the point. We need to sign better talent”.

    I think the same thing applies here. The reason that the recorded music industry is not as profitable as it would like is because in general it fails to demand of itself and its artists and producers by extension, to record better music. In a customer driven world, it is about delivering content that is sufficiently relevant to customers to motivate them to spend the money on acquiring the content. Albums are a marketing construct from the 1960′s courtesy of Clive Davis perhaps more than anyone else. He understood the economics incredibly well. For a marginal increase in vinyl you could have a maximal increase in perceived value, and therefore margin. Very smart. The bit that Clive brought to that was to make sure CBS, his company at the time, signed fantastic talent.

    But now we live in a different world. And the responsibility of the A&R man and the company is to actually ensure that artists deliver great songs/great records if the company is to profit and the artist to have a career.

    When artists start to understand that radio is not there to help them but instead to help itself and that their music is just free content for programmers and that iTunes is no different. It is a platform for distribution that flattens the world, and when record companies and publishers understand that there are no more free lunches, then we might get really good music….

    Good music will be relevant and will sell no matter what.

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