Recording labels, Apple divided over pricing

updated 4:54 p.m. ET April 2, 2006

LOS ANGELES - Three years ago, Apple Computer Inc. chief executive Steve Jobs persuaded major recording companies to buy into his vision of a simple, one-price-fits-all online music store.

As Apple’s iTunes grew into the undisputed king of digital music sales, recording companies welcomed the revenues to cushion a five-year decline in CD sales.

Now, however, some labels feel hamstrung by Jobs’ insistence on pricing all tracks at 99 cents. With the labels expected to enter into music licensing discussions with Apple this year, any moves by Apple to abandon uniform pricing will test whether music fans are willing to pay more to download music that many only a few years ago acquired for free.

“The labels really want to be able to boost up the price for downloads on new releases,” said Matt Kleinschmit, a digital music analyst with the Ipsos Insight market research firm. “The question is, are we at a time now that we want to experiment with variable pricing?”

Recording labels make about 70 cents per download but could pocket significantly more by increasing retail prices by just a few cents.

Apple and the major recording companies declined to comment on their licensing deals or the possibility of price changes.

The dispute has percolated for months, making Apple’s relationship with the labels seem acrimonious at times. The issue is complicated by several consumer lawsuits and ongoing government investigations into possible price-fixing by the labels.

Last fall, Warner Music Group Corp. CEO Edgar Bronfman Jr. suggested Apple should allow different download prices for songs and even give the labels a cut of iPod sales.

EMI Group PLC CEO Alain Levy agreed that songs by top-selling bands should be priced higher while tracks by lesser-known artists should be discounted — essentially the same approach to wholesale pricing in place for CDs and most consumer goods of varying quality.

Jobs has argued that recording companies already make more profit by selling a song through iTunes than on a CD, which carries extra marketing and manufacturing costs.

“So if they want to raise the prices, it just means they’re getting a little greedy,” Jobs said at the Apple Expo in Paris in September.

The push by labels reflects an industrywide scramble to reap the most from a business model that only three years ago seemed unlikely to survive amid overwhelming online piracy.

“The music industry is continuing to go through this huge transformation,” said Michael McGuire, vice president of research at Gartner Inc. “To the extent that they see a market that’s growing, they’re going to try to take advantage of that.”

Last year, 353 million digital tracks were sold in the United States, about one and a half times more than 2004, according to Nielsen SoundScan.

Before the launch of iTunes in April 2003, recording labels had licensed content to music subscription services that let customers listen to music as streams on their Internet-connected computers. They charged extra for a limited number of downloads, the type that can be played while offline or transferred to a portable player.

But legitimate music services didn’t fully take off until Jobs persuaded the labels to sell permanent, a la carte song downloads on iTunes.

MORE FROM U.S. BUSINESS

U.S. business Section Front

States scramble for slice of Boeing's business   AIG seeks clearance for more bonuses Lawmakers argue over billions left in TARP Madoff won't appeal 150-year sentence SEC to call for Calif. IOUs treated as securities Latest Buffett lunch auctions for $1.7 million Ron Paul’s bipartisan attack on the Fed Banks draw line over accepting Calif. IOUs Ad pushes legal pot as solution to Calif. deficit Jury finds against AIG in suit versus Greenberg U.S. business Section Front   Add U.S. business headlines to your news reader: