Apple's Content Quarrel

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In a later interview with BusinessWeek, he said that while he would like to reach an agreement with NBC, Apple has plenty of other agreements in place. "We'd love to put this back together, and hopefully over time we will," said Jobs, who claims he's had no indication that other content partners might refuse to agree to his terms. Regarding NBC's move, he says: "We've gotten very puzzled reactions from the other television studios. We sell 550 TV shows provided to us by 58 broadcast and cable networks. Rome is not burning here."

Nor will it any time soon, judging from the lineup unveiled Sept. 5. Jobs slashed the price of the iPhone, to $399 from $599, to juice up sales, and introduced a new iPod nano that adds video capability for the same price as the older models. He unveiled a deal to put a Facebook application for connecting with friends on the new Wi-Fi-enabled devices, and—in one move labels are likely to cheer—introduced the iTunes Wi-Fi Music Store that lets iPhone and iPod touch users buy music via Wi-Fi connections.

Many of those purchases will likely occur at Starbucks (SBUX) stores. CEO Howard Schultz was on hand to announce a new collaboration that gives any device with iTunes free access to the coffee chain's hotspots—and the ability to easily buy music that's playing while ordering that latte. The implication was clear: Jobs had taken off the gloves, unmasking a blizzard of new flashy, and even more affordable, devices to all but crowd out lesser competitors. If content owners wanted to mess with him, Jobs seemed to be saying, let them find enough folks using other devices to make a dent. "This new line of products will make it much harder for any content provider to walk away from Apple," says Tim Bajarin, president of Creative Strategies.

Apple Dominance

All that means is that the next few months will be a wingding for lawyers and executives involved in the still-touchy discussions between Apple and its restless content providers. The studios and record labels have chafed for years that Jobs was low-balling their content, setting arbitrary rules that limited their ability to promote lesser-selling stuff, and demanding guaranteed contracts that gave him a better deal than the content folks.

The endgame seems simple enough. The content guys want Apple to treat them much as Wal-Mart (WMT) or Blockbuster (BBI) might: They get to set a wholesale price, not Apple, which has insisted from the outset that content providers get roughly 70% of whatever retail price Apple puts on its content. NBC, for instance, might want to set a higher price for a package that would include its sci-fi hit Heroes with older episodes of Battlestar Galactica, thus moving more units of a series that might not be selling as well.

Of course, Steve Jobs has his own idea of the endgame. That seems to start with the fact that he, not the content owners, controls the rules of the game controlled by iTunes sales. That's what comes with the power of more than 600 million downloads of iTunes software and 3 billion songs sold since firing up his download service in early 2003. Most important, Apple took a huge step toward even greater dominance of the market for the devices people want to use when consuming their digital content. Those kinds of numbers—which the Apple CEO proudly shared with the Moscone Center faithful—are the stuff of power in the entertainment world. It makes for a good show. But like everything else in the media world, that script can always be rewritten.

Grover is BusinessWeek's Los Angeles bureau chief, and Burrows is a senior writer for BusinessWeek in Silicon Valley.