Apple Quarterly Earnings Lower Than Expected
Apple Quarterly Earnings Lower Than Expected

jobs The late Steve Jobs. (Photo: Justin Sullivan/Getty Images)

Ed. Note: The full version of this story appeared in the 10/20/2012 issue of Billboard Magazine, which can be purchased here.

Apple, famous for its obsession over creating user-friendly products, may have itself become more user-friendly toward the music industry under CEO Tim Cook, who succeeded Steve Jobs 14 months ago.

While the Cupertino, Calif., technology titan continues to exert significant influence within the music industry, it's also doubled-down on improving its relationship with labels and distributors during the past 18 months, according to more than a dozen executives who spoke to Billboard for this story.

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The changes range from a "more humble" tone from Apple in high-level strategic discussions to greater cooperation from iTunes staff at the operational level, according to music executives who didn't want to be publicly identified for fear of offending the world's largest music retailer.

"People are still petrified of Apple," says Rob Enderle, principal analyst for the Enderle Group, a technology consulting firm in San Jose, Calif.

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"On the other hand, Apple has become mellower under Tim Cook. That's partly due to the fact that Cook is just a mellower guy and more likely to delegate [than Jobs]. But it's also because Apple is getting a lot more competition these days from some fairly formidable rivals like Google, Amazon, Spotify and others. There's a fierce battle being fought over access to content."

Apple declined to comment for this story.

Industry executives say Apple has focused on tightening up the iTunes store, for example, by trying to weed out unlicensed "sound-alikes" -- or songs that imitate popular titles and artists -- before they hit iTunes' shelves. In the past, Apple often waited until after rights-holders complained before pulling sound-alikes off iTunes, according to several distributors. The move also helped Apple, which had to refund customers who unwittingly bought sound-alikes.

Apple has also beefed up its staff during the past year, adding executives with traditional retail backgrounds to help maximize its iTunes retail space. Instead of having people pick and choose which albums to place in iTunes, there's now more thought given to how each "square inch" of the store is used, much like in a traditional physical store.

Likely reflecting the influence of Cook, who has an unsurpassed reputation as a supply chain specialist, Apple has now implemented "scorecards" for all of its distributors, grading each distributor on how well they digitally deliver songs and their metadata, according to two distribution executives. The better a distributor's score, the more attention it receives from iTunes staffers, which have generally gotten better at communicating with content partners in the past year.

The goal, these executives say, is to transform iTunes into a tighter, more professionally run online retailer.

"Apple is stepping up its game because their executives know they're no longer the only game in town," Enderle says.

The competitor Apple seems most concerned about is Spotify, even though the Swedish streaming service doesn't directly compete with Apple in the United States. Elsewhere, Spotify sells downloads on its service, but in America, it confines itself to streaming music subscriptions.

cook Apple's Tim Cook with Foo Fighters' Dave Grohl. (Photo: Justin Sullivan/Getty Images)

SPOTIFY PARANOIA

Still, the company is sufficiently "paranoid" of Spotify that Apple's executives are starting to throw their weight around in ways reminiscent of when Jobs was in charge. According to sources at two independent distribution companies, iTunes executives have been giving them grief when they give Spotify music to stream ahead of street date. Indie executives complain that since streams don't seem to affect sales, they wonder what iTunes' issue is. But some executives suggest that iTunes doesn't want to lose its cachet as the premier place to shop for music.

Now, "we run by iTunes what music we plan to give Spotify early and if iTunes objects, we don't offer it to Spotify," one independent distribution executive says. "We still get to put plenty of music up on Spotify, because iTunes only seems to care about some of the albums."

But another independent distribution executive that has given music to Spotify ahead of street date hasn't had any problem with iTunes because of the distributor's own foresight. "I only give Spotify music ahead of street date that I am sure iTunes isn't excited about," he says. "I wouldn't give Spotify any big release because you can predict what will get [Apple] to start jumping around and screaming. You should always sleep with caution when you are afraid that the big elephant can roll over on top of you."

This doesn't appear to be an issue with major labels, as a survey of those labels didn't reveal any Spotify-related flare-ups.

For distributors, Apple's concerns about Spotify echo a kerfuffle three years ago, when Apple strong-armed labels from participating in Amazon's Daily Deal program. That promotion, which priced full albums between $3.99 and $5.99, was initially supported by the major and indie labels through tags and links to it on their own websites and their artists' sites.

Labels liked the promotion because, at the time, Amazon didn't ask for discounts on featured titles, just promotion on the artist and label sites. But when iTunes came down hard on labels, executives quickly understood that publicly acknowledging and supporting the Amazon deal was a no-no with Apple. Since then labels refrained from touting the Daily Deal on their websites. The U.S. Department of Justice in 2010 launched an inquiry into Apple's attempts to pressure labels, but didn't file a case against the company.

The incidents highlight Apple's continued clout as the dominant marketplace for digital content now more than a year after Jobs' death. Jobs is widely acknowledged for charming, corralling and in some cases threatening the music industry to get it to play ball, and to get the iTunes store off the ground in 2003.

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