The authSteveCorn150or, Steven Corn is the co-founder of Big Fish Media, a digital music distribution company working with all the major download music services like iTunes, eMusic and Napster.  He is the author of the blog, The Digital Lowdown.  This article appeared in Issue 32 of Royalty Week, dated October 9, 2007 and is reprinted here with the permission of the author. 

Recently the CEO of Vivendi, Jean-Bernard Levy, called the deal between Apple and its music providers “indecent” and complained about the lack of a differentiated compensation structure. His simple, yet bold, comment reflects the primary complaint that the major record labels have with the iTunes business model. They feel that they are not getting paid enough and they want a better deal from iTunes. As a provider of over 50,000 tracks to iTunes (and other services), one might think that I would agree with his viewpoint. However, his statements are flawed and represent a desperation that pervades the music industry today.

Referring to the iTunes deal as “indecent” is nothing short of a hyperbole. When a UMG CD is sold for $13.99, the distributor generally receives about $9.99. The record label would probably receive $5 – $6 per CD. (Note: these figures vary greatly from album to album and distributor to distributor. This estimate is admittedly rough but serves merely to give a general idea of the revenue splits for selling CDs.)

If the CD being sold is a Universal Music Group artist and the distributor is Universal’s own company, then Vivendi can claim to earn about 70% of retail sales. This is remarkably similar to the wholesale price of an iTunes sale. If a particular CD is an older catalog item, the distributor might offer it at a discounted price. This is reflected in CD sale prices ranging from $9.99 – $11.99. The wholesale on such sales will still remain about 70%.

So, it is unclear how Mr. Levy is calculating his math when he calls the splits on iTunes “indecent.” In many industries, a 70% wholesale price would be considered quite good.

I suppose that a counterargument would be that iTunes makes a lot of money selling iPods and the labels do not share in those revenues (not for any lack of trying on their part). And yet, a supplier of socks to Wal-Mart does not make money when Wal-Mart sells shoes. I suspect that the wholesale price for goods in Wal-Mart, a company notorious for having very slim margins, is no better than 70% and quite possibly much worse.

The battle between iTunes and Vivendi is certainly heating up. The labels are, no doubt, greatly concerned with the large market share that iTunes has and relinquishing control has never been a trait of the majors. For many labels, iTunes is becoming their number one retailer topping even Wal-Mart and other big box stores. If the digital marketplace was more diverse with less concentration in one retailer, then it is likely that the labels would be less critical of the wholesale pricepoint on iTunes.

It is interesting to note that Mr. Levy’s comment occurred on the same day as the beta launch of Amazon’s eagerly awaited download store. While Amazon does offer a multi-tiered pricing structure, their wholesale percentages still closely resemble iTunes. Furthermore, the revenue split on competing services like Napster, Rhapsody and Zune are even less favorable than iTunes. These services appear to escape Mr. Levy’s wrath due, I would presume, to their small market share when compared to iTunes.

So, is it the deal that is indecent? Or is it the fact that Vivendi can’t seem to find effective ways to counteract the decline in physical goods? Perhaps it is the basic fear of the power that iTunes wields.

When a market is declining, as CD sales are, it is natural for large companies to maximize their other revenue streams. Consistent with the Wal-Mart analogy, many companies feel the pressure of meeting their targeted price points and margins. And yet, it is very hard to ignore such a major retail outlet, regardless of what products you manufacture. If Vivendi decides to pull out of iTunes, I am sure that most any indie label would be happy to step in and offer their albums for the same banner slots that UMG has secured in the past. Perhaps some consumers will be upset that they cannot buy both a Nine Inch Nails (UMG) and an Artic Monkeys (WMG) track on the same store. But I doubt that it would greatly affect the general appeal of iTunes. Mr. Levy’s comments sound like a game of “chicken” where no one really cares who wins.