Why is Universal Music cozying up to Apple?

Doug Morris is supposed to be the music industry's hard-liner.

The chairman and CEO of Universal Music Group, Morris yanked music videos off Yahoo and sued MySpace for copyright infringement. He threatened to pull songs from Microsoft's online music store unless Bill Gates forked over a $1 for every Zune music player sold. He seethed over Apple CEO Steve Job's refusal to let him and the other label execs set song prices on iTunes.

So why is he now offering Jobs a plum of a deal?

Morris has approached Apple with an idea to offer a device that comes preprogrammed with Universal Music's entire library on it, sources told CNET News.com. A music industry source said Wednesday night that Apple has broached the idea of bundling music with the other three major labels but didn't show much enthusiasm for the plan. "Apple was just inquiring about whether this kind of thing would interest (the other record companies)," said the source.

It's clear now, two days after The Financial Times broke the news about the Apple-label discussions that Morris, not Jobs, came up with the idea.

Insiders say Universal Music, whose artists include U2, DMX, and The Killers, wants to pump life into subscriptions, and is tired of seeing Apple selling songs cheap and making fat margins on the music players. Not surprisingly, he wants a slice of device sales from any gadget maker that licenses his music. Morris also has ambitions of turning Universal Music into a total entertainment company.

The plan now is to "partner instead of just being a vendor," a source close to the label told News.com.

Universal revamping strategy
In the proposal Universal Music pitched to Apple, the device would come with all-you-can-eat music for a period of time, perhaps a year, and then owners would be "rolled over into a subscription service."

Label wants to breathe life into subscription services

(Credit: Universal Music Group's Web site)

Subscriptions services, such as Napster, Yahoo Music and RealNetworks' Rhapsody are dwarfed by Apple's download store but are still very important to executives at Universal Music, say insiders. They see it as a way to get people to keep paying for music and to keep tabs on what audiences are listening to, sources say.

Universal Music was a big backer of an ISP tax, according to reports. And last October, BusinessWeek reported that Morris had also toyed with the idea of enlisting the other three majors to create a music-subscription service. The plan seemingly was derailed when the U.S. Justice Department began investigating whether such a consortium would violate antitrust laws.

"These guys at Universal," said one music insider, "are so obsessed with this subscription thing...but there are publishing issues involved with bundling and I don't think they make much money off it."

What can't be overstated is Universal Music's desire to get a taste of device sales, insiders say. Back when Apple's iPods became the rage, everybody in the music industry realized they missed an opportunity. While Jobs made pennies on song sales at iTunes, he pocketed 50 percent profits on some iPod models, according to estimates by iSuppli.

It's safe to say that almost all the major players in the music industry see that as unfair. They argue that what people want isn't a music player. It's the music.

That's why Morris went after--and got--a share of the Zune as well as devices offered by Sirius Satellite Radio, XM Satellite Radio and Nokia.

The FT reported that Morris wants $80 for any Apple device bundling Universal Music songs, while Apple has offered $20.

Getting a share of music players is smart, said Forrester Research analyst James McQuivey, even if it is late. But he warns that whatever gains the labels make on device sales, they could lose in other areas. Allowing Jobs to place their music catalogs on a single device might allow him to offer a breakaway handheld that could overshadow any other gadget or music service out there.

"The labels would just be turning over their music to another Apple-only environment," Forrester Research analyst James McQuivey said. "Nobody would want anything else."

"This kind of offer would kill CD sales far more quickly," McQuivey said. "You'd be giving people that typically buy music a reason to quit buying. Besides killing off CD sales, the music industry would harm two areas that are going strong for it right now. One is MP3 sales and the other is the (free streaming) music offered by social networks Imeem and Last.fm. If I were the music labels, I would tell Apple to come back in 2009, after I've given these other services opportunity to grow."