As it turns out, Apple iTune’s new DRM-Free stance has not made it any friends at Universal Music. The way the story goes, Universal is trying to renegotiate pricing for its back library and has threatened to remove its songs. Considering Universal Music controls an artist list ranging from Shania Twain to U2, this could be bad news for Mr. Jobs.

Honestly, the argument that people should pay more for digital music than the currently accepted $.99 has always fallen on deaf ears for me. Digital music distribution is far less expensive than physical music sales. There is no legitimate reason that we should pay the same price for encoded bits that we do for a CD, the associated album art and the packaging material.

Lets explore this argument from a few angles, starting with the numbers.

Music Sales

Fake Steve Jobs did us all the favor of digging up some Universal Music sales figures, namely –

“Universal Music Group’s (UMG’s) revenues of €1,027 million declined 8.7% versus the same period last year …”

“Digital sales of €161 million were up 54% versus last year in constant currency, representing 15.7% of total revenues versus 9.9% last year…”

“UMG’s EBITA [Earnings Before Interest, Taxes and Amortization --Steve] of €57 million was down €84 million from the first quarter of last year which included the recovery of a previously expensed cash deposit in the TVT matter of €50 million. …”

A little reading well show us that the only segment of Universal’s business that is growing is online sales, and much of those sales are brokered through iTune and related distribution services. Universal is certainly biting the hand that feeds it here. Of course, if they manage to successfully renegotiate the deal, they might be able to turn a tidy profit.

This is a similar stance to the one the company took last year with their infamous “Zune Tax”, where they charged Microsoft $1 for every Zune sold to cover possible piracy that could have occurred using Microsoft’s hardware. Luckily, not enough Zune’s were ever sold for this to actually matter.

When It Rains It Pours

From the folks at Grooveshark we get another take on Universal’s newest extortion,

“Universal knows that as bad as things are for itself right now, they’re worse for its competitors. And if Universal maintains their current positions, slowly but surely their competition will die off and then they can have a monopoly over music rights.”

This is a very good point. All you need is one broken window for the entire building to fall down. If Universal is able to negotiate a flexible pricing deal with a company as large as Apple, they’ll have much stronger footing in all future deals of this kind. While their competitors are floundering, Universal will enjoy their artificially inflated prices.

Still I have a feeling that the real future of the record labels does not lie in squeezing the last penny out of online music sales. Volume is where they can really start to recoup losses from physical sales. When you have a commodity that does not become significantly more expensive to distribute as it scales, it seems ludicrous not to take advantage of that fact. Networks like Amie Street which price their songs based on the number of people who actually purchase them (more popular songs, therefore, have the highest price) are eons ahead of Universal in understanding that it’s volume that matters, not price.

Web 2.0 Roundup

As of yesterday, Apple’s official stance is that these negotiations are not actually occurring. According to Apple Insider, “Their music is still on iTunes and their not re-signing is just not true.”

Which I translate as, “We have things under control.” Maybe Universal Music finally realized that it was not in their interest to frustrate their best distribution channel in the only market segment that they are actually seeing growth.

Maybe, Steve Jobs just offered the top executives an iPhone. The world may never know.

[Be sure to subscribe to the RSS feed before leaving. Disclosure, I know the folks over at Grooveshark and am currently doing some consulting for them.]