The icy relationship between Apple and music industry continues with revelations of a heated conversation between Jobs and Sony Music chairman

On the surface, Apple's announcement that it would be offering variable tiers of pricing and would be dropping copyright protection seemed hardly newsworthy to many.  The pricing, the result of lengthy negotiations between Apple and music industry executives, seemed a mutually beneficial deal.  Apple saw copy-protection dropped, something its CEO Steve Jobs had longed called for while the music labels got variable price tiers on iTunes for the first time, something they had long dreamed of.

The negotiations between Apple and music companies work like this.  Each deals separately with Apple to avoid being found in collusion and Apple essentially agrees to identical terms with the major labels. 

However, these terms are traditionally heavily in Apple's favor, thanks to its dominant position, being by far the foremost online music provider and accounting for $1.5B USD in revenue in 2008.  The most recent talks were no exception, with Apple securing a mostly unnoticed new distribution deal which allowed new licensing of music for the iPhone, its best-selling phone offering.

The concession was a major headache for the music label's top executives.  They have long rued the dominant position that Apple has, which allows it to dictate its own terms.  They have tried to silently come up with ways to encourage a non-Apple-dominated music world, and one of the top current ones, according to analysts, was to promote cell phones as a major new market.

So to concede sales to Apple's iPhone, while competitive services like Nokia's Comes With Music are still seeing only small sales in emerging market, was a big deal.  In 2008 cell phone transactions only accounted for $70M USD in music revenue, but this number is expected to greatly grow.  And once again, Apple is poised to continue its dominance of the music industry.  The result is that the music executives aren't exactly happy.

This tension boiled over in the discussions which took place just before Christmas.  All the major players besides Sony had conceded to Apple's terms.  Rolf Schmidt-Holtz, the chairman of Sony Music, refused to consent to the new terms, insisting that Apple adopt the tiered pricing immediately, as opposed to its plan for slower adoption.  The result was a heated Christmas Eve phone conversation between Mr. Schmidt-Holtz and Mr. Jobs that saw tempers flare.

Eventually Sony gave in and Apple won yet again.  The widely reported conversation and the resulting victory represent yet again the power Apple holds over the music industry.  And it serves as a reminder of the ongoing resentment over this power that the music industry holds.  While neither company commented on the conversation, analysts have.

Dave Goldberg, the former general manager of Yahoo Music who is now an entrepreneur in residence at Benchmark Capital, a Silicon Valley venture capital firm, states in the New York Times, "I think Steve has been smart, and he knows he has the upper hand.  They can’t afford to pull their music."

Even Charlie Walk, the former president of Epic Records, a unit of Sony Music, acknowledges, "Whether the industry likes it or not, the iTunes chart showing the most popular songs in America is a major influencer of how kids today discover and communicate with their friends what kind of music they like.  It’s a very powerful thing right now in American pop culture and immediately validates a hit song."

Apple's Steve Jobs is currently on medical leave, but analysts say that his absence and possible eventual departure in coming years will have little effect on the heated nature of Apple's relationship with the labels.  Writes Tim Arango of the New York Times, ”Even if Mr. Jobs does not get personally involved in future negotiations, music executives still fear dealing with Apple. One chit the company holds is the power of the iTunes home page, where it promotes music. They also say that the entire Apple staff, including Eddie Cue, the vice president in charge of iTunes who handles the relationships with the record labels, do their best to follow Mr. Jobs’s style in their own negotiating."

So for the near future, the relationship between Apple and the labels seems likely to continue to be a relationship of necessity, and anything but friendly.

"You can bet that Sony built a long-term business plan about being successful in Japan and that business plan is crumbling." -- Peter Moore, 24 hours before his Microsoft resignation

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