Why Music Labels Must Dance to Apple's iTunes

| About: Apple Inc. (AAPL)

By Carl Howe

A little-noted article in MacWorld UK last week presented some most interesting data regrading Apple's (NASDAQ:AAPL) iTunes versus the rest of the online digital music stores. While largely citing Digital Music Group data saying that 89% of digital music revenue comes from iTunes versus 5% for all subscription services combined, I found this quote added much-needed color to the discussion:

Speaking on condition of anonymity, one independent label owner praised iTunes because the service hands over the most of the 79-pence per track sale price directly to the label – but is furious at the kind of revenue he's generating through other online services.

The label head's comments don't consider the slice of income that's handed across to music publishers, but he's pretty clear that iTunes offers his acts the better deal.

"For everything sold on iTunes, we get the majority of the 70-79p per unit sale price," he said, then added: "But for everything sold on the Ruckus Network we receive the princely sum of £0.005 per unit. That's half a pence. My distributor then takes their 25 per cent off of that, leaving myself and the artists to dish up the remaining fractions of a penny between us."

It's not much better through Real Networks, he informed – for sales through that service, his label receives a penny per track, he claimed. The thousand tracks sold so far have accrued £10 to the label (to share with the artists) rather than, "the £790 or so we'd have got for the same amount of sales through iTunes."

What this says to me is that despite music label griping about their needs for variable pricing and subscription services from iTunes, those services would, in fact, make less money for both artists and labels, despite iTunes larger volumes of sales. It also speaks volumes about why Universal Music demanded a payment on every Zune sold -- it knew it was going to only make pennies from Microsoft's music store if it didn't.

Despite what the likes of RealNetworks (NASDAQ:RNWK) and Microsoft (NASDAQ:MSFT) say, the digital music business has turned into a very simple marketing proposition. With Apple now the fourth largest retailer in music in the US, and the largest digital music distributor, if a label wants to earn the most money for their music, they need an Apple deal, pure and simple. It's not a technology or Mac-versus-PC religious argument; it's a distribution business decision, similar to decisions about selling through Wal-Mart (NYSE:WMT) or Amazon (NASDAQ:AMZN). And that business decision is measured in the difference between pounds and pence.

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