The media conglomerate--which is the No. 1 supplier of digital video to Apple's online store, accounting for about 40 percent of downloads--notified Apple of its decision late Thursday, according to a person familiar with the matter who asked for anonymity because negotiations between the companies are confidential.
A spokesman for NBC Universal, part of General Electric, confirmed the decision, but otherwise declined to comment. A spokesmen for Apple declined to comment. The decision by NBC Universal highlights the escalating tension between Apple and media companies, which are unhappy that Apple will not give them more control over the pricing of songs and videos that are sold on iTunes. NBC Universal is also seeking better piracy controls and wants Apple to allow it to bundle videos to increase revenue, the person familiar with the matter said.
NBC Universal is the second major iTunes supplier recently to have a rift with Apple over pricing and packaging matters. In July, the Universal Music Group of Vivendi, the world's biggest music corporation, said it would not renew its long-term contract with iTunes. Instead, Universal Music said it would market music to Apple at will, which would allow it to remove its songs from iTunes on short notice.
The action by Jeff Zucker, NBC Universal's chief executive, will not have an immediate impact on iTunes. The current two-year deal extends through December, so a vast video catalog--some 1,500 hours of NBC Universal's news, sports and entertainment programming--will remain available on iTunes at least until then.
Among the most popular NBC Universal shows available for sale on iTunes are Battlestar Galactica, The Office and Heroes. The company has been talking to iTunes about offering Universal movies, but has not done so to date because of piracy concerns.
The two companies could still reach an agreement on a new contract before their current deal expires. While each side has so far refused to budge, the talks will continue and have been free of acrimony, the person familiar with the matter said.
But the defiant moves by NBC Universal and Universal Music could embolden other media companies that have been less than thrilled with Apple's policies. NBC Universal was the second company to sign an agreement with Apple to sell content on iTunes, and its contract stipulated that Apple receive notice of plans to cancel 90 days before the expiration date. Otherwise, the deal would automatically renew according to the original terms.
Assuming similar provisions in deals negotiated with media companies like CBS, Discovery and the News Corp., a parade of 90-day windows will be coming due.
A move by NBC Universal to walk away or withdraw a large amount of content would probably hobble Apple's efforts to move deeper into the sale of video-focused consumer electronics like the iPhone and a new class of iPods. While Apple's early efforts in this area depended on music to fuel sales, analysts say video is what will drive much of Apple's retail business in the future.
The iTunes service wields incredible power in the music business, since it accounts for more than 76 percent of digital music sales. And its influence is on the rise: Apple recently passed Amazon.com to become the third-biggest seller of music over all, behind Wal-Mart Stores and Best Buy, according to the market research firm NPD.
But the sale of video online is still at a nascent stage. Media giants like NBC Universal are aggressively trying to move into the business--in part to avoid the piracy that has plagued music companies--but the revenue they earn from online video sales does not yet have a material impact on their financial performances.
So some media companies feel they have the upper hand: Apple, for now at least, needs their content more than they need Apple. And there are an array of companies--like Amazon, Wal-Mart, Microsoft and Sony--that would love to have NBC Universal as a partner to muscle in on Apple's turf.
Then there is NBC Universal's own Hulu.com, a venture in partnership with the News Corp. to build a video portal to compete with YouTube.
The risks that media companies face in removing content from well-known Web sites involve perception and promotion. NBC Universal could anger consumers by preventing them from easily watching shows and movies in the most popular way--through iTunes and the iPod. Television networks and movie studios have vigorously tried to avoid being branded with the same anticonsumer sentiment that has worked against the record labels.
And because iTunes is so popular, NBC Universal would lose an increasingly important way of marketing entertainment products, particularly fledgling television shows, to consumers.
For months, most media companies have grumbled that Apple underprices video and audio content as a way to propel sales of a much more significant profit center: iPods and related merchandise. (One noteworthy abstainer from the grumbling is the Walt Disney, which has Apple's chief executive, Steve Jobs, as a board member.)
The iTunes service has sold songs for 99 cents each since its beginning four years ago, except for the recent introduction of songs without copy protection. Episodes of television shows sell for $1.99, with movies priced at $9.99.
NBC Universal and other companies say they want to increase prices by packaging content--say an episode of The Office with the movie The 40- Year-Old Virgin, because they both star the comedian Steve Carell.
In the past, Apple has argued that a range of pricing would complicate the iTunes experience and squelch demand.