Apple may need to play better with others

By Peter Burrows

updated 3:52 p.m. ET Jan. 14, 2008

If this year's Macworld Conference & Expo follows form, Apple Chief Executive Steve Jobs will pull the curtain back on a new device or two that will capture the consuming public's fancy. Early word, for example, is that he'll announce a slick new sub-notebook that, if successful, could help make mainstream a product that until now has occupied only a niche. That's what Apple did for digital music players with the iPod and for smartphones with the iPhone.

But for Apple to make the most of its peerless products, experts say it will need to improve relations with the folks who create the content to run on them, especially after the series of spats that marked 2007. Recall the refusal by Universal Music Group, the world's largest record label, to re-up its long-term contract to supply music to Apple's iTunes Store, or the move by General Electric's NBC Universal to pull its TV shows from iTunes. (MSNBC.com is a Microsoft-NBC Universal joint venture.)

Despite the setbacks, Apple still maintains more than 70% of the online music business and, by BusinessWeek estimates, controls nearly the same share in online video download sales. Still, an inability to play well with the entertainment industry could hurt Apple in the long term. The recording industry, for example, could move further into the arms of competing online distributors, such as Amazon.com. And as Apple hopes to push deeper into video distribution and playback, it will need to at least match the access of a slew of rivals to the world's films, shows, and other forms of video. "Everyone is flexing their muscles to prove they don't need each other," says eMarketer analyst Paul Verna. "But the truth is, they do."

There are some signs of détente. At Macworld, studios including Disney and News Corp.'s 20th Century Fox are expected to announce support for a new iTunes movie rental service. Fox and others are also expected to make their newest releases available at iTunes, something only Disney currently does. But Apple is clinching such deals in part because of its newfound willingness to compromise, say sources. Apple has agreed to increase the wholesale price it pays to studios, from $14 to closer to the $16 they get when they sell a DVD to Wal-Mart, say people familiar with the negotiations.

More from BusinessWeek Apple Takes on Techdom What Apple Should Do Next iPhone Fun

The more conciliatory stance in video contrasts with the company's historical approach to the recording industry. With 70% of the digital music market, Apple is the third-largest distributor behind Wal-Mart and Best Buy. Little wonder Jobs won't budge on key points, such as paying labels variable rates for various artists or charging customers anything other than 99¢ a song.

Jobs has far less leverage in video. Sure, Apple has an early jump on sales of movies and TV shows online. But the online download market accounts for a miniscule portion of the total, just $268 million, or 0.7%, of $35 billion in 2007, according to Adams Media Research. Studios have little incentive to give Jobs advantages over well-entrenched, bigger partners, from Wal-Mart in DVD sales to TV networks via broadcast licensing deals. Even video-on-demand services from cable companies such as Comcast and satellite operators such as DirecTV now make up a $1 billion market that's growing rapidly. Says one network executive of sales through iTunes: "There's nothing wrong with it, but it's a niche business."

MORE FROM BUSINESSWEEK

BusinessWeek Section Front

Stock Market Shrugs Off Jobs Report Oracle's Sun Deal: Oracle May Need to Loosen Its Grip Stocks: Five Market Mistakes to Avoid Referendums 2009: Gains for Government Spending, Gambling Banks' H1N1 Flu Vaccines Stir Outrage Intel-Dell Dealings Under Fire A Bold Plan for Chrysler Drugmakers' Payments Draw Heat Augmented Reality: Getting Beyond the Hype Stocks Finish Mixed BusinessWeek Section Front