Is Apple iTunes Bad for the Music Business But Good for Music? (AAPL, AMZN)

The US Department of Justice has started looking into complaints that Apple, Inc.’s (NASDAQ: AAPL) business practices in the music industry may be anti-competitive. The inquiries are not yet a formal investigation, but a move to find out whether or not a formal investigation should be initiated.

Apple has reportedly been trying to strong-arm music companies into welching on their deals with Amazon Inc. (NASDAQ: AMZN) to give the retailer exclusive access to new releases. Amazon has been negotiating to get a one-day jump on new releases in exchange for a prominent position in the web site’s ‘MP3 Daily Deal’ promotion, according to The New York Times.

Apple, known more in recent years for its iPhone and iPad than for its runaway success in the past with iTunes and the iPod, is allegedly threatening to withdraw its own support for any label that participates in Amazon’s offer. That’s more than an idle threat, because Apple owns a 69% share of the market for online music sales. Since opening its online iTunes store in 2003, Apple has sold more than 10 billion songs.

The music companies, which once welcomed the new sales channel, are now miffed because Apple sets the price for the music and has become the primary intermediary with music buyers. Those roles have belonged to the recording industry since it began in Thomas Edison’s day. Although the Justice Department is not naming names of complainants, it’s a good bet that at least some are coming from the recording industry itself.

That the recording industry is suffering is no secret. CD sales, long the staple of the business, is down more than 50% since the mid-1990s. The industry has successfully fought off in court a series of encroachments on what it sees as its patrimony. The only group it has failed to persuade of its righteousness is music consumers, who have taken to single copy purchases and audio streaming in droves.

Music labels for years have promoted album sales, which force customers to buy 10 songs they don’t want to get the 2 that they do. The companies saw single-tune sales through the iTunes store as an incremental revenue stream. They missed the fact that customers were fed up with paying $16 or more for a lot of stuff they didn’t want. Now that customers can buy just what they want, the labels don’t have the slightest notion of how to respond.

The problem for the labels is how to maintain the hefty revenue stream from CD sales that support the rock ‘n roll lifestyle the companies are accustomed too when Apple iTunes and other digitial music sites are such a bit hit for consumers with iPods and other MP3 devices. Now that it’s possible for a musician to record and distribute music cheaply without a label, the variety of music available is growing wildly and the labels aren’t able to cash in.

They can’t cash in because they have nothing to offer the artist except wide distribution of physical CDs. Any other deal with a label is just unnecessary from the artist’s point of view. The exception is for the legacy acts that have a legacy audience likely to buy any CD the act puts out. But even that hasn’t worked very well for more than a year now.

Looked at from a distance, the variety and scope of music available today is probably better than it has ever been. And the music companies haven’t done anything to make that happen except to fight it as hard as they can. Apple opened the door to a completely new way of doing the music business and the labels have nothing to fight back with. Unless the recording industry gets a clue pretty soon, not even an anti-trust ruling against Apple will save it.

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