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NBC, Apple play game of brinkmanship

news analysis A day after reports said NBC would not renew its iTunes contract, Apple announces it will not offer NBC's new TV shows. This spat is about control.

A correction was made to this story. Read below for details.

news analysis An Internet game of chicken is being played by entertainment heavyweights Apple and NBC Universal, and the first round likely goes to Apple.

NBC Universal landed the first blow on Thursday night when someone leaked to The New York Times that the media conglomerate was refusing to renew its contract to offer downloads of TV shows via iTunes.

NBC never said that it would pull out of iTunes, but only that it was dissatisfied with the financial terms Apple offered. Then Apple raised the stakes by announcing it would not offer NBC's shows for the upcoming TV season and alleged that NBC Universal was asking for a price hike that would have required Apple to raise retail prices from $1.99 to $4.99.

When it comes to public relations battles, Apple is a devastating counter-puncher. The revelation about NBC Universal's demands is almost certain to rally consumers around Apple. To them, it appears that Jeff Zucker, NBC Universal's CEO, wants to stick his hands deeper into their pockets and Steve Jobs is protecting them.

But the long-term significance of the split between the two companies has more to do with control. This could be the start of a much wider struggle between Apple and the entertainment sector over who dictates prices at iTunes. The people who create music, movies and TV shows appear determined to push Apple off its pricing strategy.

Just ask Chris Castle, an intellectual property lawyer who once represented the original Napster but now owns his own music label.

"I think there is a general perception in the industry that we need to get tough with Apple and break the lock they have on the consumer market."
--Chris Castle, intellectual property lawyer

"I think there is a general perception in the industry that we need to get tough with Apple and break the lock they have on the consumer market," Castle said. "I think what's happening is that there is a general gestalt of 'Apple is a pain in the (butt) so let's help some other companies out. Let's do something to build up a retailer other than Apple.'"

Earlier this year, Universal Music announced that it would not renew a long-term contract to sell music via iTunes. Instead, the company opted for a series of short-term contracts. Universal is believed to have lobbied Apple for varying pricing levels.

Many in the music industry, including music publishers and performers, want Apple to be more flexible with pricing instead of locking the industry into a 99-cent rate for each song.

In video, NBC Universal, owned by General Electric, appears to be among the first to challenge Apple over pricing, even while downloads of TV shows and movies make up only a sliver of Apple's revenue.

Apple needs to have access to a wide range of content to keep iPod owners interested in their devices. Apple's iPod succeeds mainly because of iTunes; its simplicity, low prices and quality content. What happens if Apple lost access to the best music and TV shows?

"As long as Apple wants to sell TV shows and films, it's in their interest to offer as many content providers as they can," said Susan Kevorkian, an analyst with IDC.

To do that, Apple has to appease studios and record labels without alienating customers.

Allen Weiner, an analyst with Gartner wrote on his blog: "Apple must face the fact that charging flat rates for television programs of varying lengths and vintage will not resonate with an industry for which advertising is its lifeblood."

But the risks involved with bucking Apple are great. Apple has sold more than 100 million iPods. The iPod makes up more than 70 percent of the overall mobile player market. How long can NBC Universal go without access to iPod owners?

Even with the company's other distributors, such as AOL and its soon-to-launch Hulu site, which NBC Universal built in partnership with News Corp., Apple still represents one of Internet's largest video distributors.

NBC has to know that the concept of watching TV and movies downloaded from the Web still faces an uncertain future. Download times are often long, the quality is often inferior to television, and nobody has really answered the question of whether people need to watch longer-format shows on their computers when the TV experience isn't broken.

Other than YouTube, the video-sharing site that serves up snippets and 10-minute long clips, no other online video service has proven it can attract a big audience.

And trying to force Apple to offer tiered pricing could mean alienating the world's most influential consumer goods companies. What other new products and services could NBC Universal miss out on by angering Apple now?

Apple agreed to a long-term deal with EMI, and the two companies worked together on releasing music in an unprotected format.

Most likely, Apple will continue its tough stand with NBC Universal. It has to. If the computer maker gives much ground, other content companies may also play the brinkmanship game.

"The bad news for Apple is that after something like this, people start to question your dominance," Castle said. "Something like this happens and suddenly you got some tarnish on your armor."

Correction: This story incorrectly stated that NBC wants Apple to raise the wholesale price from $1.99 to $4.99. The prices are retail.