Vivendi Calls Apple iTunes Contract Terms "Indecent"

[Suhit Gupta]

<div class='os_post_top_link'><a href='http://news.yahoo.com/s/nm/20070924/media_nm/vivendi_outlook_dc' target='_blank'>http://news.yahoo.com/s/nm/20070924/media_nm/vivendi_outlook_dc</a><br /><br /></div><i>"Vivendi condemned as "indecent" the contract terms between its Universal Music Group (UMG) unit and Apple Inc, the computer maker whose iTunes online store dominates the digital music market. Vivendi is one of many large media companies that are trying to challenge Apple's grip on the digital entertainment market and obtain more control over pricing. It said it was in talks with rival distributors. "The split between Apple and (music) producers is indecent ... Our contracts give too good a share to Apple," Vivendi Chief Executive Jean-Bernard Levy told reporters at a gathering on Monday organized by the association of media journalists in France. At present, UMG, the world's largest record company, gets 0.70 euro ($0.99) out of the 0.99 euro retail price charged by iTunes, Vivendi said. Among other things, Levy called for the remuneration of a new release to be higher than for a 30-year-old classic. "We should have a differentiated price system," he said."</i><br /><br /><img src="http://www.digitalmediathoughts.com/images/2007_09_24t123702_450x302_us_vivendi_outlook.jpg" /><br /><br />On the one hand, it is great (IMHO) that companies are working to reduce Apple's grip on the music sales business. But then, why are they so upset if UMG is getting 70% of each track sold by iTunes? I guess they are clearly looking for a larger piece of that pie.

[Phronetix]

This is all very interesting. It does seem these companies do not understand the poor optics they create when they air these sorts of complaints publicly. Here is a generalization of the thought process the goes on when this gets published:

"Music Company: We are being ripped off by a greedy Apple, and only take 70% from the proceeds of each track!

Joe Public: What? That is ridiculous! How can you be making 70 freaking percent of the money?!?!?!?!

Music Company: This is far below the inductry standard. It is only fair for us to get more.

Jane Public: Wait a minute! You are already taking 70% of the proceeds! You are saying you want more, and you want me to support this?!?!?!? Take less, and charge me less!!"

****************************

I have no idea what is actually considered to be a fair cut in this industry. I just think that the record companies gain absolutely no support from anyone when they go public with this issue. It makes them look bad, look greedy really in the eyes of anyone not professionally involved in the music business. There may be a few people out there with some sort of childish need to see Apple get cut down that might support them, but those are in the minority.

They need to keep these negotiations private where they belong. The record company should get a fair cut according to industry standards. Apple knows this too, and they are protecting their income as anyone would, and is trying to make the wiggle room in negotiations favor them as much as possible.

Clearly these contracts were not unfair or unreasonable when the companies signed them a few years ago. If anything, they only have themselves to blame for all of this. So, shut the heck up and go about your business. Grrrr.

Good day all. :wink:

[Jeremy Charette]

Ditto.

This is pure greed. If I recall correctly, someone did a financial analysis of Apple's costs per song a while back, and their profit comes out to something like 1 to 5 pennies per song. Meanwhile the record companies are taking 70 cents on the dollar. Obscene.

[Jason Dunn]

I have no idea if 30% is fair or not - it seems somewhat surprising that it costs Apple 25 cents per song to run iTunes.

On the other hand, I bet if you were to compare how much Wal-Mart or Amazon makes per CD sold, I bet it's more than 30% of the total price.

[Felix Torres]

The issue isn't the fraction of the sale price; its the sale price itself and what it is doing to their business. The studios' problem is they didn't understand their own customers when they signed up for iTunes and didn't realize that instead of growing their audience they would be canibalizing their cash cows at 10 cents on the dollar. They're not complaining about "only" a 70% per track cut, they're complaining about a 10% return on their per-customer sales.

Remember what the studios consider to be the baseline market; the 1990s. Pre-Rio 300, pre Windows95, pre MP3:
Britney spears (or whoever) would cough out a hit single that would sell as part of a CD album for $12-13, of which the studio would net something like $7-9, even after payola. Didn't matter if the act got any more hits off the album; one hit was all that was needed to finance the whole album.

Now, what you get is the same pop-tart or boy band coughs up a single and the fans buy that single. The studio get $0.70 out of that customer. If no more hits come, that's all they get. So, from their point of view, they have as many customers as before, but their revenue-per-customer just dropped 90%.

Even if the album is decent enough to spawn two, three hits, and some album sales, they're still only clearing a couple dollars per customer.
Of course they see this as obscene, regardless of whether Apple makes a profit or not. From where they're standing, Apple is a gatekeeper that is throttling a major revenue stream that canibalizes their main cash cow (CD sales) without returning a reasonable return on their investment.

What they want is to sell that hot single that everybody wants *this* week for $2.50 and sell the entire album for maybe $9.00 and incentivize customers to buy the full album. (Its no accident that the Amazon D/L sells albums around that price.) Then, when the album isn't as hot, the album price might drop a buck or so but the individual tracks would drop a lot to maybe $1 each. And for old back-catalog stuff that nobody would buy at a buck a pop, they could charge 50 cents a track or $5 an album.
Of course, variable pricing raises the retailer's costs, so Apple wants nothing to do with it. They don't want to have to track prices and they don't care how many people buy a specific track or when; their per-track costs are fixed.
Which brings us where we stand.

Apple has the power of lock-in and they are quite willing to use it to force the studios to stay with a pricing model that is bleeding them to death.

The only alternative the studios face is to support alternate retailers by giving *them* better terms, which means bleeding even deeper in the shorter-term to try and break the deal they made with the devil.

Their only alternative is to build a new delivery platform to replace CDs *and* compressed digital downloads. Which would be easily doable but requires them to:
a- understand their customers
b- understand digital technology
c- be willing to take a big short-term investment hit in order to regain control of their business.
As they are incapable of any of the three, they are up the proverbial creek with no paddle. So we'll hear a lot of whining, a lot of grumbling but no effective action against Apple's lock-in.

At this point any action they are likely to take will be worse for them.
Consumers?
Well, the Amazon model is looking pretty darn good actually.
If they can get a bigger catalog in place and maybe tie in CD sales to D/Ls they might make a modest dent in the Apple monopoly. But the studios are never returning to their old profit margins unless they get smart and they're just not capable of doing that.