Apple's (AAPL) iTunes: Custer's Last Stand

The record industry is being destroyed by a combination of cheap digital downloads and falling CD sales. Apple’s (AAPL) iTune operation is now the third largest seller of music in the US behind big box retailers Wal-Mart (WMT) and Best Buy (BBY).

The ripping of CDs pulls untold millions of dollars from potential legitimate sales. And, shareholders in music publishers are paying for it. Warner Music Group’s (WMG) stock is down 50% in the last year.

So, it should not be terribly surprising that the publishers want more money, a bigger cut, from what is likely to be their largest sales outlet within the next year, iTunes. Apple is likely to object to the idea, but the music guys are running out of options. Animals can be dangerous when cornered.

According to The New York Times, Universal Music, a unit of Vivendi, the largest music publisher in the world, had decided not to renew its deal with iTunes for another year. Instead, it will offer music to Apple as long as it likes the terms. By going that route, Universal could put individual titles at will.

Universal’s music accounts for one out of every three albums sold in the US, according to Nielsen. Universal could hurt iTunes, But, perhaps iTunes could hurt Universal more by refusing to carry its titles at all. That would probably lead to protracted anti-trust litigation, the kind that has haunted Microsoft (MSFT) for years.

But, in the short term the question will be whether other large publisher like Warner would join a revolt and whether the artists represented by the large music companies will have a problem with having their music pulled from the iTunes platform.

Artists may be finding another way to market their music, and that could work against Apple. Music company EMI and tech firm Snocap have set up a system so that artists can sell their records in an MP3 format, which would work on a number of devices including the iPod. The techology would allow them to sell their songs directly from their own websites or from social network sites.

Up to now, Apple has been able to hold the music companies in line. That may be ending.

Douglas A. McIntyre can be reached at [email protected]