Apple calls the iTunes, Independents Missing From European Launch

By | June 19, 2004 at 12:00 AM

JUST days after the European launch of Apple Computers’ online music store, a chorus of customers are voicing their complaints.

The lack of songs from artists on independent record labels – which account for a quarter of the UK market – has left iTunes looking like a poorly-stocked American import store, lacking local talent such as Travis and Franz Ferdinand.

“Most Scottish acts are on independent labels,” says Alison Wenham, chairman and chief executive of the Association of Independent Music (AIM), which represents the majority of the UK’s indie labels.

“Celtic acts typically start off very strong in their home market and this niche initially makes them attractive to independent labels. It’s a great shame many of them aren’t on iTunes.”

Scotland on Sunday has learned that AIM first called a meeting with Apple last summer following the hugely successful launch of iTunes in the States, where it commands 70% of the music download market.

“I sent a team to explain how we work in Europe,” says Wenham, “but they refused to recognise collective management as a more efficient way to secure rights.”

In an apparent bid to force their hand, Apple instead issued contracts directly to a select few independent labels a mere seven days before the UK store’s launch.

On close inspection the indies discovered they were being offered a lesser deal than the major record companies – a claim Apple publicly rejects – and talks between the two sides last weekend broke down.

There are also doubts over Apple’s claims of having more than 700,000 tracks on iTunes, with just four records in the current Top 10 available for purchase. Furthermore, big name artists such as Coldplay, Oasis and David Gray are conspicuous by their absence – despite being available on the US store.

One record industry insider said: “It seems as if the timing of the iTunes launch was dictated more by the speed of the competition, rather than a desire to offer a complete service.”

It is believed Apple was pressured into an early launch following Napster’s entry into the UK market a month ago.

Napster, once the scourge of the music industry for its illegal online song-swapping service, was relaunched as a legal, paid-for service in the US last October.

Napster’s song prices, at £1.09 per track, are much higher than Apple’s 79p. Napster also offers a monthly subscription service which offers users extra features such as unlimited song streams, in which music can be listened to but not copied.

Revenue from subscription services is important to many companies in the digital music market because profits on individual song downloads are extremely slim.

Indeed, Apple’s chief executive, Steve Jobs, finds it difficult to understand how his competitors are making money. “We’re breaking even, maybe making a tiny bit of money,” claims Jobs. Pressed on how much the record companies make, Jobs would only say: “It’s large!”

Apple’s primary profit stream comes from sales of its iPod – the portable music device on which users can play tracks that have been downloaded to their PCs.

Until now, iPod users copied (or ‘ripped’) music from their own CDs or acquired it illegally through peer-to-peer applications such as KaZaA and LimeWire. The launch of the iTunes store is simply designed to make the process of acquiring music much more convenient.

The iPod has achieved

iconic status since its launch in 2001, becoming the Walkman of the internet generation. It has stacked up sales of more than three million, becoming a particular hit in the UK where it accounted for one in six of global iPod sales last Christmas – the biggest single market in Europe.

It is the vertical integration between iTunes (the software) and the iPod (the hardware) that has been key to Apple’s success. Because it owns “the whole widget”, Apple can control the user experience from beginning to end.

As well as being an online store, iTunes acts as a digital jukebox for organising and playing songs. When the iPod is connected to a PC it seamlessly grabs any songs that have been added to iTunes since the last update. Quite simply, it lets users take their entire music collection and enjoy it on the go.

Curiously “vertical integration” was used by Apple last week as an argument against the merger by music giants Sony and BMG. In its submission to the European Commission, Apple expressed fears that Sony, which is expected to launch its own online service in the UK later this month, will offer favourable terms to its own artists.

Whatever the outcome of the proposed merger, analysts still predict Apple will continue to be one of the dominant players in this emerging market. But as a relative latecomer in the UK market, Apple may not achieve the monopoly it has enjoyed in the States. Analysts say we will not be able to judge whose launch has been most successful until the start of next year, following the crucial Christmas season.

“The success of these stores is so inextricably linked to the sales of digital devices,” says Mark Mulligan of Jupiter Research. “This is where Apple wins as they’ve created a powerful brand around both iTunes and the iPod.”

Perhaps the biggest threat, as Apple’s Steve Jobs points out, is the pirate services which continue to prosper.

The challenge is immense: how do you convince a whole generation of teenagers, now accustomed to acquiring their music for free, to start paying 79p per track?

Apple doesn’t believe you can. With the most popular model of iPod retailing at nearly £300, it is clear their core market is the over-25s. Furthermore, all the online stores currently require a credit card to purchase music, therefore excluding most teenagers.

Busy, tech-savvy professionals seem to be a particular target. Jobs says iTunes will attract the kind of people who just don’t have the time to search for illegal tracks.

“You get really unreliable downloads,” he says of the illegal download services. “You have to try several times before you actually get the song. And then you find that it was encoded by a 10-year-old and the last five seconds was cut off.”

Jobs believes that by offering a better, more reliable product, Apple can attract music fans willing to pay. The company is also providing added-value services such as exclusive songs and music videos. It is also trying to persuade the record companies to offer deleted records which cannot be found in the high street shops.

Indeed, it is those bricks-and-mortar stores that are likely to see the biggest challenge from the online world. Recognising the threat, both HMV and Virgin have launched their own online stores backed by OD2, the distribution and technology platform co-founded by rock star Peter Gabriel.

“We very much expect to be a player in this market,” says Paul Barker of HMV. “But it’s a market in its pre-infancy and nobody knows for sure how big it will be.”

Currently, online revenues account for just under 2% of the US record market. Jobs thinks this could rise to 5% within the next two years but remains cautious.

“All these transitions take a long time,” he says. “Who knows what’s going to happen in the long run, but in the short run I think record stores have their own issues.”

The big issue for Apple remains its public spat with the independent record companies. Both sides are keen to come to an agreement and continue to talk following last week’s iTunes launch.

Given Apple’s 70% market share in the States, it might be argued that the independents need Apple more than Apple needs them. However, Simon Wheeler of Beggars Group, doesn’t see it that way.

“It simply makes it even more important that we get acceptable terms, otherwise they’ll become an even bigger monopoly, and that would be incredibly dangerous thing for the independent industry,” he says.

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