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Contract Length Was Barrier to iTMS Deal, Music Indie Group Says

TMO Scoop - Contract Length Was Barrier to iTMS Deal, Music Indie Group Says

by , 8:00 AM EDT, June 16th, 2004

The Association of Independent Music (AIM), representing Europe's independent labels, confirmed for late on Tuesday that a disagreement over the length of a contract to sell their artists music was the main reason Apple Computer launched its iTunes Music Store in Great Britain, France and Germany Tuesday without a majority of music from smaller groups and artists.

AIM spokesman Sam Shemtob told The Mac Observer the sticking point in negotiations with Apple was the length of the agreement and his group's insistence that their be a review of royalty fees every six to twelve months.

"We were far off on a number of important issues with Apple," Mr. Shemtob said. "Whether Apple was negotiating with AIM or with the labels separately, they wanted a three year contract and we wanted a two year agreement. In addition, we wanted a universal price review after six or twelve months. They didn't want to give us that. We were having trouble finding common ground."

Mr. Shemtob said the main reason AIM and indie labels wanted the right to negotiate royalties every six or twelve months was the constantly changing market for online music downloads.

"This market is changing each and every day," he said. "Who knows what growth there will be in the next year. Independent artists deserve the right to look at the situation on a regular basis and re-think their strategy."

Mr. Shemtob said another issue was Apple's unwillingness to have an adjustable royalty price that would go up as the retail price goes up.

"We wanted an agreement that said there would be an escalated royalty percentage paid to indies if and when the retail price went up," Mr. Shemtob commented. "Apple again was unwilling to discuss such a clause."

Mr. Shemtob confirmed that similar contractual agreements Apple rejected were successfully negotiated with other online music services, such as Sony Connect, the old and new operations of Napster, Yahoo, OD2, Wippit, O2 Music and Sony's Japanese operation, Computer Network So-net.

"We don't understand why we could come to an agreement with these other companies, but not with Apple," Mr. Shemtob said. "The terms they wanted certainly hurt the deal."

Executives representing some of Europe's major independent labels confirmed to The Mac Observer Tuesday that while Apple refused a shorter contract length and no price review option, it apparently negotiated such a deal with Vivendi Universal SA's Universal Music, one of the world's largest record labels.

"It's our understanding Apple agreed to a two-year contract with Universal and agreed to re-visit royalty pricing every six months," one executive who asked not to be identified, told TMO. "Why couldn't they agree to a similar deal with us?"

Mr. Shemtob said Apple had opted to negotiate with indie record labels individually when it had the opportunity to negotiate as a whole with AIM. Mr. Shemtob also said Apple had approached many indie groups and labels in just the past few days, making it almost impossible to reach an agreement in time for Tuesday's iTMS announcement.

AIM was on hand at the Apple announcement Tuesday, handing out fliers outside the Old Billingsgate Market on the banks of the River Thames explaining their stance on the negotiations with Apple.

Apple refused comment on its negotiations with the independent European labels, citing its long-standing policy to not comment on its business arrangements.

Missing indies a setback to overcome, analysts say

Industry analysts who watch the European computer and online music business feel the launch of the iTunes Music Stores without a large majority independent music artists is a black eye, but something Apple can overcome and capitalize on if they move quickly.

"They are launching without the indie artists that currently make up 22 percent of UK music sales," said analyst Simon Dyson of Informa Media, based in London. "This is a bit of a downside for Apple. It's almost a quarter of UK sales. I'd imagine they (Apple) are disappointed with that."

"I think indies perhaps want to have an offer of what you'd get as a major record label," Mark Mulligan, a media analyst based in London with Jupiter Research, told The Mac Observer, Tuesday. "The perception, whether it's right or wrong, is that independent labels feel they have been undervalued."

Mr. Dyson said he'd be surprised if the indie labels are not on board soon.

"It's such a big share of the UK and European markets that Apple needs to have them on board very soon," Mr. Dyson said. "I think it will get done sooner rather than later."

"How important is it for Apple to have these indie labels on board? It all depends entirely upon what sort of success iTunes has against its competitors," Mr. Mulligan said. "If Apple believes they really do need to have those labels on board then they will come back to the table with an improved offer, I'm sure. I think they'll come to some agreement soon because I think domestic content is absolutely key to European music services and so much of domestic music is tied up in independent record labels."

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