All Shook Up, Right Down to the Musical Core

SO omnipotent is the Apple digital music machine that just the possibility of one of its main suppliers holding back some of its music from Apple's iTunes music store is enough to make headlines and send shock waves.

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That is what happened last week when the Universal Music Group let Apple know that it would no longer grant the company guaranteed access to its coming releases. Officially, Universal had no comment, but an executive briefed on the negotiations said the music company was merely interested in keeping its options open as it does with most other retailers in the brick-and-mortar world.

The upshot is that Universal will provide music to iTunes on an "at will" basis. Thus, if someone offers Universal a boatload of cash for the right to sell the latest Bon Jovi or Rihanna singles exclusively on a rival download service, Universal is saying that it is open for business.

This bit of news could shake up the digital music business because Universal, owned by Vivendi, is the world's largest music conglomerate, representing one of every three albums sold in the United States. And it underscores the longstanding and increasing tension between Apple and the entertainment industry, not to mention the scores of rivals who spend days and nights plotting for ways to chip away at the primacy of the Apple iPod. (That primacy has already bolstered sales of Macintosh computers and, if all goes as Steve Jobs plans, will soon spread to mobile phones and home video.)

Theoretically, Apple may be concerned because of Universal's market clout; an Apple spokesman did not return calls seeking comment. On the other hand, Universal is not about to turn its back on Apple, given that 15 percent of its global sales come from digital downloads.

"It looks like a little bit of saber-rattling," said Susan Kevorkian, an analyst who covers the consumer audio business for IDC. "We're not seeing ultimatums being dished out here. It's a very symbiotic relationship."

But there is little question who is benefiting the most from the symbiosis so far. Mr. Jobs's "iSpawn" holds more than 70 percent of the market for portable music players and more than 80 percent of the online music sales business - a fairly unassailable lead, as contenders like Samsung, Sony and Microsoft have found. You can almost imagine Mr. Jobs shrugging at Universal's new terms: "Go right ahead."

But as more music sales move online, the volume is turning up not just among hardware players but also among digital music service rivals that include Amazon, Yahoo Music, Napster and Rhapsody. According to figures released last week by Nielsen SoundScan, physical album sales decreased by 15 percent from Jan. 1 to July 1 this year, while sales of digital tracks, though still a much smaller business, rose 49 percent.

In this environment, the music industry has a tempestuous relationship with Mr. Jobs, more respect-resent than love-hate. Label chiefs respect that he has revolutionized the online and portable music businesses at a time when so many others have flopped, and file-sharers and sites like Russia's AllofMP3.com - a site that labels have accused of piracy - have wreaked havoc on the industry's business models. (AllofMP3 was conveniently shuttered last week as President Vladimir V. Putin of Russia prepared to visit President Bush.) But the chiefs resent Mr. Jobs's rigidity in areas like pricing - 99 cents a track, take it or leave it - and iTunes' proprietary digital-rights management software, which has made songs sold there impossible to play on rival devices.

Most of all, they envy that Mr. Jobs is in a much higher-margin business of selling gadgets. Ms. Kevorkian of IDC said the label chiefs might still hold out hope that Apple will share someday the spoils of each iPod sold - along the lines of how Microsoft agreed to pay for each of its Zune players, introduced last year. But only a million Zunes have been sold, while iPod sales have topped 100 million.

Mr. Jobs ruffled some industry feathers in February by suggesting in an open letter that music labels ought to drop their requirement for digital-rights management protection because only a small percentage of the music on his customers' iPods was bought through the music store - the rest was from uploads of people's own collections. So far, only one of the four big music companies, EMI, has sided with Mr. Jobs and lifted the digital-rights management protection on its online catalog, selling those singles for .29 each. (Keep in mind that the protection does not exist on physical CDs, which is how the industry got into its file-sharing pickle in the first place.)

Although his anti-protection measure stance is somewhat self-serving - European antitrust regulators had been circling the closed iTunes system - there is anecdotal evidence to suggest that Mr. Jobs may be on to something. And, if so, the other big label groups - Universal, Warner Music and Sony/BMG - could follow suit and offer protection-free tunes, although perhaps not with their entire catalogs, as EMI has done.

What is astonishing about the music industry, versus other forms of media, is the amount of entrepreneurial fervor it attracts at every level - from indie labels to Web and satellite radio to fan sites and consumer electronics giants and mobile phone operators. This partly explains why Universal has at least raised the possibility that iTunes and the iPod might not forever be the only game in town.

Certainly there is no shortage of pretenders to the throne. Although they have struggled to gain traction, the digital music outlets of retail giants like Wal-Mart Stores or Best Buy compete aggressively and can't be counted out.

A few new ventures are starting free download services supported by advertising. And one start-up gizmo that James L. McQuivey of Forrester Research is eyeing is Slacker, which will combine a portable MP3 player with a wide range of Internet radio stations from which consumers can sample music. A key difference, Mr. McQuivey said, is that the Slacker could be much friendlier to music merchandising than the current iTunes/iPod setup.

AMAZON, meanwhile, has announced plans to enter the online music store fray by introducing a service next year that will sell only songs that are free of digital-rights management protection. That could give it a leg up if, as expected, the other big music labels start to offer some of their music on that basis.

Although Amazon has had its digital media stumbles, it has the dual advantage of knowing its customers' cultural habits and being a popular online destination where people go to buy electronics and CDs. Indeed, you could imagine Amazon cutting an exclusive deal to offer a hot Universal track for a week or two when combined with the purchase of an MP3 player.

That might not be great for iTunes, but it would probably be good for sales of iPods, which stand as a triumph of Mr. Jobs's trademark design and simplicity. Having spent years trying to keep the computer operating system of his Macintosh computers separate from the much bigger Microsoft Windows, Mr. Jobs has learned that interoperability can work to his benefit.

Oddly, Universal or anyone else doing exclusive deals with iTunes' rivals could end up reducing the clout of iTunes but spurring more sales of iPods - and that means more music to Mr. Jobs's ears.