The deal that forever changed music and technology

Lessons from Apple's historic iTunes deal with the five major music labels

Jul 14, 2021

“It is hard to remember, given Apple’s string of hits … that this rise was entirely unexpected, and a surprise even to the people who engineered it.”

Schlender & Tetzeli, “Becoming Steve Jobs”

Today it may seem obvious that Apple is a giant global technology company. Or that consumers use their credit cards to pay for digital content online. Or that artists can make money online. But back in 2002, these truths seemed unlikely at best. That is why Apple’s iTunes partnership with the five major music labels may be the most transformative consumer technology deal of the last 30 years.

When Steve Jobs announced the iTunes Store on stage in 2003 he said “This will go down as a turning point for the music industry.” He was right. But it was also a turning point for Apple, setting the company on a course to launch the iPhone four years later. And to becoming the first company worth $1T fifteen years later.

Today’s This for That post highlights Apple’s iTunes deal in reverse, starting with lessons you can use, then some details about how Jobs pulled off the deal and finally some of the surprising historical context you have probably forgotten.

Lessons from Apple’s iTunes deal

Passion - after Wynton Marsalis met with Steve Jobs he said “I don’t care much about computers and kept telling him so, but he goes on for two hours. He was a man possessed. After a while, I started looking at him and not the computer, because I was so fascinated with his passion.” You don’t need to be Steve Jobs to show passion. Your partners can smell when you truly believe in what you’re saying and selling.
Focus wins - In 2002, Microsoft was a sprawling collection of business units. Each had their own agenda. Sony, too, was a sprawling collection of business units. Each had their own agenda. But Apple was laser focused. Focus is how the tortoise beat the hare. Focus is how David beat Goliath. Focus is also how Spotify beat iTunes in music after Apple became a sprawling collection of business units. Focus wins.
Customer obsession - Jobs knew customers wanted to own their music. “I think you could make available the Second Coming in a subscription model and it might not be successful,” he said. The music labels put their priorities ahead of their customers. Their digital music services only allowed customers to rent the music, not own it. Eventually, customers came around to subscription music streaming (e.g. Spotify, Pandora). But in 2002, Apple’s insight into the customer made iTunes a breakout hit.
Selling an experience beats selling technology - “Steve did something brilliant. He proposed the complete system: the iTunes Store, the music management software, the iPod itself. He had the whole package.” said Doug Morris from Universal Music, who helped Apple convince other music labels to get onboard after seeing an iTunes demo. Jobs told music industry exec Jimmy Iovine “Your tech folks are never going to do this. There’s no one at the music companies who can make it simple enough.” Later, Iovine called another music industry executive and declared “He’s got a turnkey solution.”
The power of a common enemy - Aligning five major music labels was a seemingly preposterous task. But Jobs used the threat of piracy to his advantage. As one biographer wrote “he was sure to remind [the music labels] that the digital onslaught they were trying to ignore was inevitable and irrepressible.” What is the common enemy that aligns your various negotiating partners?

The pitch & deal terms

Steve Jobs’ pitch focused on the product demo - “Unlike other CEOs, he was totally engaged with the product,” Warner Music exec Paul Vidich said after seeing Job’s demo iTunes.
Jobs used Apple’s small size as an asset -“Jobs pitched that his new service would be only on the Macintosh, a mere 5% of the market. [The 5 major music labels] could try the idea with little risk.”
For users, a simple end-to-end experience: Jobs insisted that songs could be purchased individually rather than bundled as part of an album. Jobs insisted on $0.99 per song.
For music labels (and artists), protection of their intellectual property - Apple developed a proprietary software that would prohibit users from sharing the songs they purchased. This meant iTunes could allow users to own the songs they purchased without threatening revenue to music labels and artists.
Apple offered music labels 70% of iTunes music sales but no revshare on hardware sales. Apple kept all revenue from iPod devices. This was a major source of contention among the music labels, particularly Sony. They knew their music assets would help sell iPod devices.

Historical context

Apple was tiny. Microsoft was a giant - in 2002, Apple’s was worth $5B compared to $276B for Microsoft.
Sony dominated portable music devices - Sony’s Walkman had dominated portable music devices for 20 years. “How Sony missed this is completely mind- boggling to me, a historic fuckup,” said Jimmy Iovine.
The internet represented a real threat to the music industry - CD sales dropped for the first time ever in 2000 and then again in 2001 thanks to peer-to-peer (P2P) file sharing startups like Napster.

The outcome

iTunes took 6 days to sell 1M songs (Apple had previously forecasted that milestone would take 6 months). iTunes sold 70M songs in the first year.
Steve Jobs negotiations with the major music labels paved the way for his negotiations with Bob Iger at Disney, which brought its TV and film content to the iPod in 2005.
With music and entertainment content partnerships secured, Apple launched the iPhone in 2007.

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