Apple Negotiating The Record Industry's Future

It always impresses me that Apple CEO Steve Jobs has taken control over the record label moguls.

Jobs knows what the next generation wants. He has the sales to prove it.

Record execs have no idea what the next generation wants and if they do, they have no idea how to give it to them. They are reduced to suing their customers and making demands of radio stations to pay for using music over the airwaves.

Jobs wears jeans and a turtleneck shirt and looks like a geek. The record industry crowd is a fashion statement on the entertainment business. Unfortunately for them, the geek is cleaning their clocks.

Now, while Apple negotiates with the labels over the next generation of iTunes, he's in the driver's seat and the labels are in no position to stand up to Jobs.

Business is good -- great -- for Apple.

Business sucks for the labels.

It's always hard to predict Steve Jobs, but there are some hints that allow us to speculate at what the next iTunes standard will be.

Jobs could finally give in on variable pricing (some iTunes could cost 99 cents, others more or less). He's set the precedent for DRM-free music from EMI's catalog. The labels really want this. The youth market, in my opinion, does not. They want to pay less not more for downloaded music and I'm talking about the Gen Yers who are willing to pay for music.

It is conceivable that Jobs trades some variable pricing for DRM-free music. The labels know they are going to lose on protecting digital rights management and maybe getting variable pricing makes the bitter medicine go down better.

I believe that the winning ticket is to reduce the price of some digital downloads but never increase them above 99 cents. In fact, I don't think even Apple will be able to hold the 99 cent standard download price for more than a few more years.

And on DRM, the labels know they are going to have to relent so why trade variable pricing for DRM-free music. Hopefully, Jobs is more brilliant than I am giving him credit for here.

Oh, and Jobs is not at all going to consider giving up iTunes DRM-protection called Fairplay nor is Apple going to share it with competitors any time soon. Take that to the bank.

On higher fidelity, Jobs won concessions from EMI in return for variable pricing of better sounding songs but I am not convinced the next generation cares much about fidelity. The iPod is a convenience. The ear buds are usually horrible and yet the convenience has trumped better fidelity. Jobs should deliver a better sound (and what he's promising with the EMI catalog is really not much better), but he won't get away with charging more for it.

Don't be surprised if you see some breakthroughs on bundling of video and audio products. Apple has been toying with this strategy and the labels are very interested in new marketing schemes and formats. It's not a forgone conclusion but increased digital bundling is a real possibility.

Of course, Apple knows that legal downloads on its iTunes platform have peaked -- it happened last year. They are also aware that piracy is still rampant.

Never forget that Apple -- the elephant in the music industry's room -- has a hot stock because it sells devices not music. The music is there to help sell devices.

The labels, on the other hand -- the tortoise in the room -- are losing money because CD sales are down, digital downloads still contribute to a small part of their income and they've lost control of their business to a computer company run by a stubborn, brilliant and unpredictable guy named Steve Jobs who could care less about the record business.