Analyst: Universal Deal Could Create iTunes 'Nightmare Scenario'

News that Vivendi's Universal Music Group has refused to renew its contract with iTunes on the same terms as the last time around has spawned predictions that the online music industry may be in for a big change.

Universal reportedly has requested a month-to-month arrangement with iTunes to distribute its music; the label owns the rights to music from such popular artists as U2, Eminem and Sting. Neither Apple (Nasdaq: AAPL) nor Universal returned calls for comment by press time.

Universal has all the leverage it needs to make changes happen, Rob Enderle, principal analyst with the Enderle Group, told MacNewsWorld. "The critical aspect of this market is content," he said. "If you don't have content, it doesn't matter what technology you have."

Apple's Control Waning

Apple's dominance in the music download industry has given it control it perhaps might not have had otherwise, Enderle commented. The company that skyrocketed to the top of the online music world with its iPod music player has set standards, such as the flat rate of 99 US cents per song, and the tendency for consumers to purchase songs a la carte rather than through subscription.

However, iTunes' dominance in the online music space has made it a target for every other service out there, Enderle noted. In fact, chances are good that Universal's pressure on iTunes to negotiate a much more flexible contract for its music is coming from a negotiation or at least consultation Universal is making with another online music service, he speculated.

Those other services have realized that the only way to get an edge in the market is to convince music labels to grant them special offerings and pricing options, Enderle noted. That means those music content owners need to be less exclusive and more nimble in their dealings with iTunes.

'Nightmare Scenario'

While the Universal situation is "scary" enough for Apple, the momentum it may create among content providers could make a "nightmare scenario" for iTunes, Enderle asserted.

"Now content owners are asserting their power," he said. "What Universal is doing is what everyone else would like to do, and they're likely to follow suit."

Thus, as each music company's contract comes up for renewal with iTunes, each may use its newfound leverage to negotiate special terms -- terms that differ from Universal's.

The resulting mishmash of pricing plans and options for music -- some special singles for higher prices, some without digital rights management coding -- will likely confuse consumers. Those consumers then may begin to find music subscriptions more appealing than song-by-song purchase, argued Enderle. This is the business model that iTunes has resisted with great power up to this point, but that power may be diminishing.