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Music moguls trumped by Steve Jobs?

The dominance of iTunes and iPod has some recording industry leaders questioning their download deal with Apple.

When Apple Computer CEO Steve Jobs walked into the suites of top record label executives in 2002, iTunes software in hand, he was welcomed as a trailblazer to a digital music future.

Now, nearly two years after Apple's iTunes launch, record executives have become worried that they have inadvertently ceded too much power over their industry to this charismatic computer executive.

Frustrated at what they see as Jobs' intransigence on song pricing and other issues, some record executives are now turning their hopes toward other partners, particularly mobile phone carriers eager to get into the business of selling music. They see this new focus as a way to broaden the digital music business, and lessen Apple's dominance over their market in the process.

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The dominance of iTunes and iPod has recording business moguls questioning their deal with Apple.

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Frustrated at what they see as Steve Jobs' intransigence on song pricing and other issues, some record executives are now turning their hopes toward other partners, such as mobile phone carriers.

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"The (wireless) carriers' economics are aligned with us much better than Apple is aligned with us," said one senior executive at a major record label, who asked to remain anonymous because of his company's ongoing relationship with Apple. "The mobile market is very important, as important to us as the PC."

Jobs is given undeniable credit for jump-starting what is now a fast-growing digital music market, but some music executives complain that his company, with 70 percent of the digital download market, is setting the ground rules for their own business.

While iTunes is designed to propel the sales of iPods--more than $1 billion worth in the last quarter alone--the labels complain that Apple's policies are insensitive to their goals and limit their ability to grow their digital business even faster.

For example, Apple wants to sell all its songs for 99 cents each, a single price point that's easy for consumers to understand. But the record labels have pressed for the ability to vary prices to maximize their own sales. They want to sell older titles at a discount--like the $9.99 CDs available in most record stores--and charge more for popular songs to take advantage of market demand.

Jobs also has refused to license Apple's antipiracy technology, called FairPlay, to rival MP3 player makers, and has blocked music formats from other companies, such as Microsoft, from the iPod. This makes iPods and the iTunes store incompatible with rival digital music devices and stores, fragmenting the market in a way the labels fear ultimately limits sales.

"We hate the current situation," one top record industry executive said, referring to the issue of incompatibility between different companies' music devices and services. "There is one man who's going to decide this...No record company by itself can basically tell Steve Jobs, 'You're not going to get our catalog unless you open up FairPlay to Microsoft.' We can't do it together."

Apple declined to comment for this story.

Despite the critics, Apple continues to win praise from many customers and industry analysts. They point to Apple's clear success in spurring the download business as proof that Jobs is on the right track with pricing and other policies.

"Apple really understands that pricing models are critical," said Jupiter Research analyst Michael Gartenberg. "I think 99 cents resonates with consumers as a sweet spot."

Many customers like the convenience and pricing. "iTunes really sucks you in," said Jackie Kerr, an iTunes customer in Baltimore. "I don't mind the 99 cent cost, though sometimes I do feel stupid for paying $1 for some horrifying '80s band I don't want to admit liking."

"I think 99 cents resonates with consumers as a sweet spot."
--Michael Gartenberg
Analyst, Jupiter Research

When iTunes launched, most of the record labels were more squarely in Apple's camp. Part of the reason was Apple's limited role in the computer industry: They saw the Macintosh market--less than 5 percent of the total U.S. computer market--as a small, relatively safe way to experiment with Jobs' ideas.

Instead, iTunes, replicated on the PC platform a few months later, exploded into a popular hit that almost overnight defined the standards for the digital music business. Apple's iTunes store captures close to 70 percent of digital music sales, according to the most recent analyst figures. The iPod holds a similar share in the portable MP3 player market.

"I think it's safe to say that Apple has generated so much interest in digital music downloads as a paid service, the labels clearly understand Apple's influence," Gartenberg said.

Wireless, the music industry's new savior
For the most part, the labels have remained loath to push too forcefully against the company that still accounts for the vast majority of their new online sales.

Instead, they are turning hungrily to the mobile phone market, where phones are slowly gaining the capacity to play music. Executives note that there are many times more cell phones than iPods in the world, potentially offering a far larger digital music market. Already full-song download services for cell phones are operating in Europe and Asia, and are expected to come to the United States as soon as this year.

Part of the mobile market's attraction comes in pricing. Consumers around the world have shown they will eagerly pay $2.50 or more for a ring tone, a mere snippet of a song that costs just 99 cents for the full version at iTunes. Labels see these consumers as receptive to variable prices for different songs.

But some music executives also describe mobile carriers as simply better potential partners than Apple. Like the labels, the carriers' bottom line depends directly on selling content, while Apple's profit sheets depend on hardware sales.

The carriers' interests were underlined in the case of Motorola's iTunes-enabled cell phone, announced nine months ago but now delayed. As described by the companies, the phone would let people transfer their iTunes-purchased songs from computers to the phone.

Publicly, carriers say they are interested in the idea and will offer the phone to their customers if there is demand.

"Here was a phone that I was supposed to sync to my PC so I could buy music from Apple. Why would the carriers subsidize that?"
--Iain Gillott
Wireless industry consultant

"Ultimately, the consumer is the boss," said John Burbank, vice president of marketing for Cingular Wireless. "We're going to create products that best match what the consumer wants to do."

But mobile industry sources say some carriers have been critical of Motorola's move, which would encourage consumers to buy music on a computer rather than over the phone network. Because most phones are sold with a substantial subsidy from the wireless carrier, their lack of interest has set back the release of the iTunes phone.

"Carriers subsidize phones and features when they drive network usage," said Iain Gillott, a wireless industry consultant. "Yet here was a phone that I was supposed to sync to my PC so I could buy music from Apple. Why would the carriers subsidize that?"

None of this means the labels are likely to stop dealing with Apple. Indeed, the companies continue to work closely behind the scenes discussing issues such as CD copy protection and new promotions. And label executives are quick to commend Apple for doing more than any other company to create the digital download business.

And any business relationship, particularly in new arenas, is bound to have its bumps, insiders say.

"The relationships are really better than ever," said Cary Sherman, president of the Recording Industry Association of America. "Everybody understands where the other side is coming from. Everybody understands that there is a market here, and everybody's trying to find a path. The dialog is healthier and more wide-ranging than it's ever been."