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Universal Music Takes on iTunes


Relationships in the entertainment world can be famously fraught. And few are more so these days than the one between Steve Jobs and Universal Music chief Doug Morris. You may recall that Morris recently refused to re-up a multi-year contract to put his company's music on Apple's iTunes Music Store. That's because Jobs wouldn't ease his stringent terms, which limit how record companies can market their music.

Now, Morris is going on the offensive. The world's most powerful music executive aims to join forces with other record companies to launch an industry-owned subscription service. BusinessWeek has learned that Morris has already enlisted Sony BMG Music Entertainment as a potential partner and is talking to Warner Music Group. Together the three would control about 75% of the music sold in the U.S. Besides competing head-on with Apple Inc.'s (AAPL) music store, Morris and his allies hope to move digital music beyond the iPod-iTunes universe by nurturing the likes of Microsoft's Zune media player and Sony's PlayStation and by working with the wireless carriers. The service, which is one of several initiatives the music majors are considering to help reverse sliding sales, will be called Total Music. (Morris was unavailable for comment.)

This isn't only about Jobs; Morris badly needs to boost his business, and Apple is the one to beat. The iTunes store has grabbed about 70% of downloads in the U.S. And the iPod--well, what's left to say about that juggernaut? Plus, music companies have been here before. A few years ago they launched services with the aim of defeating Napster-style file-sharing--and failed miserably. And let's not forget that existing subscription services have signed up only a few million people, vs. hundreds of millions of iTunes software downloads.

While the details are in flux, insiders say Morris & Co. have an intriguing business model: get hardware makers or cell carriers to absorb the cost of a roughly $5-per-month subscription fee so consumers get a device with all-you-can-eat music that's essentially free. Music companies would collect the subscription fee, while hardware makers theoretically would move many more players. "Doug is doing the right thing taking on Steve Jobs," says ex-MCA Records Chairman Irving Azoff, whose Azoff Music Management Group represents the Eagles, Journey, Christina Aguilera, and others. "The artists are behind him."

Morris and Jobs were once the best of allies. When Jobs began pushing his idea for a simple-to-use download store in 2003, Morris backed him. Industry insiders say Jobs felt that Morris, unlike many other music executives, understood that they had to adapt or die. And in the years that followed, Apple and Universal moved in near lockstep.

But before long, Morris realized he and his fellow music executives had ceded too much control to Jobs. "We got rolled like a bunch of puppies," he said during a recent meeting, according to people who were there. And though Morris hasn't publicly blasted Jobs, his boss at Universal parent Vivendi is not nearly so hesitant. The split with record labels--Apple takes 29 cents of the 99 cents--"is indecent," Vivendi CEO Jean-Bernard Levy told reporters in September. "Our contracts give too good a share to Apple."

After unilaterally breaking off talks with Apple in July, Morris continued offering Universal's roster--Eminem, 50 Cent, U2, and other artists--to Apple, but on a month-to-month basis. That freed Universal to cut special deals with other vendors, such as cell carriers eager to generate revenues. AT&T (T) is packaging ringtones and music videos of Universal artists and is expected to start selling downloaded tracks with videos soon.

That's not all: In August, Morris announced a five-month test with Wal-Mart (WMT), Google (GOOG), and Best Buy (BBY). The three companies will sell music downloads that can be played on any device--a freedom not available to buyers of iTunes songs, most of which play only on Apple devices and software. Morris wants to see if the downloads, which won't have copy protection, will help cut into piracy and hike sales. And of course he won't be upset if iPod owners bypass iTunes.

With the Total Music service, Morris and his allies are trying to hit reset on how digital music is consumed. In essence, Morris & Co. are telling consumers that music is a utility to which they are entitled, like water or gas. Buy one of the Total Music devices, and you've got it all. Ironically, the plan takes Jobs' basic strategy-- getting people to pay a few hundred bucks for a music player but a measly 99 cents for the music that gives it value--and pushes it to its extreme. After all, the Total Music subscriber pays only for the device--and never shells out a penny for the music. "You know that it's there, and it costs something," says one tech company executive who has seen Morris' presentation. "But you never write a check for it."

The big question is whether the makers of music players and phones can charge enough to cover the cost of baking in the subscription. Under one scenario industry insiders figure the cost per player would amount to about $90. They arrived at that number by assuming people hang on to a music player or phone for 18 months before upgrading. Eighteen times a $5 subscription fee equals $90. There is precedent here. When Microsoft was looking to launch a subscription service for Zune, Morris played hardball. He got the tech giant to fork over $1 for every player sold, plus royalties. Total Music would take that concept even further. "If the object is to wrest control of the market from Steve Jobs," says Gartner analyst Mike McGuire, "this is a credible way to try it."

Of course, Morris still needs Jobs. It's noteworthy that Universal has not pulled its music from iTunes--Morris simply can't afford to do that. Universal's earnings fell 25% in the first half. Jobs, of course, knows that and can afford to be magnanimous. "Doug's a very special guy," the Apple chief told BusinessWeek. "He's the last of the great music executives who came up through A&R. He's old school. I like him a lot."

By Ronald Grover and Peter Burrows


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