Universal Challenges Apple's iTunes Hegemony By Refusing Long-term Contract

The long-standing disagreement between Apple and the music industry's major players is heating up, according to reports in both the New York Times and the Wall Street Journal. Vivendi-owned Universal Music Group has decided not to renew its annual contract with #1 digital music retailer iTunes, according to the Times, which claims to have the inside track, quoting "executives briefed on the issue who asked for anonymity." The companies have argued over pricing and interoperability between non-iTunes digital download and the apple-produced iPod; not renewing a long-term contract gives Universal leverage against iTunes' policies, especially with regards to pricing, by allowing it to sell its music through competitors' download sites. It also allows Universal to pull some or all of its music from iTunes as it sees fit. In truth, both companies stand to lose big if they cease cooperating. Universal Music and its related companies account for one in three new albums released in the U.S., including major sellers like Eminem, 50 Cent, U2 and Sting. Meanwhile, Digital music sales account for 15% of Universal's total sales, much of that from iTunes, and the number is growing (Universal doesn't break down exactly how much of its sales are from iTunes versus other digital sources).

Sources: Wall Street Journal, New York Times
Commentary: ITunes Now Number Three Music Retailer in U.S. -- Survey • Apple's DRM-free Music: Balancing Consumer Rights with Accountability • What’s Next For Apple As The DRM-Free Music Era Begins?
Stocks/ETFs to watch: Vivendi (VIVEF.PK). Competitors: Apple (AAPL). Microsoft (MSFT), Napster (NAPS), Wal-Mart Stores (WMT), Best Buy (BBY), RealNetworks (RNWK), Amazon.com (AMZN). ETFs: Internet Architecture HOLDRS (IAH), Internet HOLDRS (HHH), Consumer Discretionary SPDR ETF (XLY), Vanguard Consumer Discretionary VIPERs (VCR)
Conference call transcripts: Apple F2Q07 (Qtr End 3/31/07) Earnings Call Transcript

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