The Catalyst Code

The power struggle for the digital music ecosystem continues. NBC just announced that it wasn’t going to renew its agreement with Apple to sell its digital videos—about 40 percent of the iTunes downloads—through the iTunes Store. That follows Vivendi’s similar decision last month. NBC reportedly wants to be able to control its pricing and product bundling decisions at the iTunes store and have more say in piracy protection. That’s something that many content providers want. But Apple wants to remain at the center of this ecosystem which it arguably created or at least breathed an awful lot of light into. It is in a pretty good position to dictate terms to many of the content providers since it has sold more than 100 million iPods many of whose customers get their legal content from the iTunes. NBC has enough clout on the video side that it can buck Apple. My guess is this is a bluff for now and that these two companies, who need each other, will reach an agreement before iPod users can’t find the latest episode of the Office on iTunes.

The continued grumbling by the content owners over Apple’s low-ball prices does raise a question as to whether Apple’s business model is sustainable. The iPod/iTunes platform is only as good as the content that consumers can get. Sure, many of them are happy enough downloading a lot of free stuff, uploading their CDs, and engaging in massive piracy. In fact, what’s been downloaded from the iTunes store could account for only a fraction of the iPod hard drives. My guess, though, is that many consumers place significant value on getting their favorite television shows and songs and at least for now those are produced, expensively, by publishers who want to get compensated for their costs and risks. Apple is giving these content providers very strong incentives to look for better alternatives for selling digital content. And very strong incentives for competitors of Apple to come up with a product and business model that appeals to the high-end content providers as well as consumers.

Most successful catalysts, as Schmalensee and I describe in our book, turn their suppliers of content into cherished customers. Apple might succeed by sticking its thumb in the eyes of its content providers if it can keep competing music devices and stores from getting off the ground. I doubt it. What do you think?