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Universal, Apple Set To Play Chicken

The Universal Music Group, the largest of the four major record labels and a subsidiary of Vivendi SA, is reportedly trying to change the terms of its contract with Apple for selling digital music through the iTunes store.

Instead of renewing its previous contract to sell its online music catalog through iTunes, Universal is looking to market its music to Apple "at will," meaning Universal could remove songs from the iTunes service on short notice if there is a disagreement between the two sides.

Universal and Apple had a two-year contract, which was extended for one year last year and has now expired, according to Billboard. As the rumors in Billboard and other publications go, Apple was hoping to renew the deal for another two years, but Universal does not wish to be tied in to such an agreement should something better come along.

The question is, what might that "something better" be? Market research firm The NPD Group said iTunes accounts for 76 percent of digital music sales. For that reason, said Van Baker, research director for Gartner, Universal really has nowhere to go.

"It's negotiation time, and everyone has to posture a little to see what they can do for give and take on the deal," he told internetnews.com. "I'm sure that's what Universal is trying to do, posturing for a better deal. Apple knows they could go to [RealNetworks'] Rhapsody or Napster, but their unit volume would be 20 percent of what it is through iTunes at best. It's a cut off your nose to spite your face argument."

According to Wikipedia, UMG holds 25.5 percent of the marketshare of the music industry. It's home to artists like Shania Twain, Bon Jovi, Elton John, Jay-Z, Mariah Carey, U2 and up and comers like Amy Winehouse and Akon.

Neither Universal nor Apple responded to inquiries from internetnews.com, nor did either side appear to be commenting publicly to any press or media outlets for the time being. Apple is coming off the enormous success of theiPhone launch, further cementing Steve Jobs's position as a force in consumer electronics.

In the four years since iTunes first launched, it has emerged as the place to go to buy electronic music, assuming people actually buy it. A report last month by NPD Group found iTunes was the number three music retailer behind Wal-Mart and Best Buy, with 9.8 percent of the total music market.

NPD found that digital music continues to grow, accounting for the remaining 13.8 percent of total sales. But to hear Jobs tell it, iTunes is but a bit player. In February he published an open letter to the industry, claiming only three percent of music on iPods was bought at the iTunes store.

In that letter, Jobs also stuck to his guns when it came to iTunes pricing, despite pressure from labels to change. Labels have complained for years about the iTunes pricing structure of 99 cents for every track, instead of lower prices for older songs and a higher price for newer, hit songs.

Also, there is continued resentment at the lock between iTunes and the iPod. People want choices, to use non-iPods with iTunes, and to use some other software than iTunes with the iPod player. On this, Jobs remains intractable.

"Clearly the music industry is not happy with the degree of control Apple has over the market and prices and the pressure that Apple's putting on them to remove the DRM,"  said Baker. "They feel like Apple has gained an inordinate amount of power in the music marketplace. The problem is, if you try and play hardball with them, they are likely to say 'ok fine,' and what's your alternative?"