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Over Christmas there was some intense negotiations between the various record companies and Apple over the removal of Digital Rights Management and Variable Pricing for music. The primary issue was that Apple wanted to get music distribution onto the iPhone because they felt that impulse buying on the iPhone was an important component to growth. They had offered variable pricing in return for these terms but over Christmas Sony was the only hold out, which resulted in Steve Jobs intervening.

In interviews, several high-level music executives, who spoke on the condition that they not be named to avoid angering Apple, said they operated in fear of Apple’s removing a label’s products from the iTunes store over a disagreement, even though that has never happened. The labels do not have much leverage in negotiating with Apple.

Overall the music industry fears the growing power of iTunes and Apple particularly the front page:

One chit the company holds is the power of the iTunes home page, where it promotes music………“Whether the industry likes it or not, the iTunes chart showing the most popular songs in America is a major influencer of how kids today discover and communicate with their friends what kind of music they like,” said Charlie Walk, the former president of Epic Records, a unit of Sony Music. “It’s a very powerful thing right now in American pop culture and immediately validates a hit song.”

What music industry executives are worried about is the growing power of the front page (and recommendation engine) of iTunes and the ability of iTunes to influence consumers. Couple that with a retailer that has enormous market power in the only growing sector of their market and you have a potential perfect storm for the executives of the music industry.

In the past the system worked on the concept of finite shelf space and fragmented music retailers. The music distribution companies were the distribution choke point and they decided what ends up on the front shelf at your music store and they got to kick around the music retailers. They were the ones that controlled what consumers got to hear on the radio, and they were the ones that decided how to price and promote an artist. (We all remember where we transitioned from Albums and Tapes to CDs). We could not understand why it was more expensive when the cost of manufacturing was lower. The transition of technology had traditionally always been good for the music executives, but this time the rules changed because they knocked straight into the network effect, the effect that creates natural monopolies because of their accumulate effects that benefit customers.

But today market power is shifting back to one large online retailer who continues to grow in substance and power each day. However what the music executives lose sleep over and could threaten their Gulfstream G650s is the ability for Apple to get into the music distribution game and sign artists directly.

Those with market power already, for example Madonna, already control all of the rights to their music. It would not be fantasy to suggest that the next album that Madonna releases will be an iTunes only album. What this means to the artist is a far greater share of the revenue stream as well as more control over how it is marketed. This is not that far away. After all the objective is to get their share of iPod hard disk space.

However the one thing that really kills them(music execs)  is the potential that Apple will have the ability (soon) to market new artists. Currently how the system works is much like American Idol. Hundreds of talentless and semi talented people get in front of a small group of “experts” who decide who gets to make an album and who gets shown the door. Even before the walk through the door for the first time, they have to submit to an oneous contract and are stripped of all rights to their own talent. (That is not to stay this is how it happens in the normal course of recording companies because there is usually lawyers on both sides involved, but that controlling a really talented person like Kelly Clarkson is indeed mining gold). However the market power of the record companies is controlling the distribution and access to that distribution. Currently if you are seriously talented you must deal with these people in order to participate in the channel. It is important for them to make sure that the artists know you cannot participate in this market without them. What they don’t need is the front page (and recommendation engine) of iTunes to create an alternative outlet where a talented artist can work the process and create exposure independently of the labels.

With the front page (and recommendation engine) of iTunes you potentially have the potential to create the next Pop Idol through simple exposure.

This is not to say that music industry system as we know it today will disappear anytime soon. This is because  there is a hugh system in place already to vet and process artists employing millions of people as we speak. The hard work behind the scenes still has to be done. Writing songs, the studio work, production and marketing as well as road time. A potential deal on iTunes does not preclude the hard work building the infrastructure behind your career as many people that you have never heard of already have done. What it means is that it is feasible for an artist to be a major success without having to deal with the major labels and that is what keeps music execs quaking in their G650s. Those cliche scenes where the young band working out of a garage gets the call from a record producer from Atlantic or Sony, will be replaced with the call from Apple one day.

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