NBC Will Not Renew ITunes Contract

NBC Universal, unable to come to an agreement with Apple on pricing,
has decided not to renew its contract to sell digital downloads of
television shows on iTunes.

The media conglomerate — which is the No. 1 supplier of digital video
to Apple's online store, accounting for about 40 percent of downloads
— notified Apple of its decision late yesterday, according to a person
familiar with the matter who asked for anonymity because negotiations
between the companies are confidential.

A spokesman for NBC Universal, part of General Electric, confirmed the
decision, but otherwise declined to comment. A spokesmen for Apple
declined to comment. The decision by NBC Universal highlights the
escalating tension between Apple and media companies, which are
unhappy that Apple will not give them more control over the pricing of
songs and videos that are sold on iTunes.

NBC Universal is also seeking better piracy controls and wants Apple
to allow it to bundle videos to increase revenue, the person familiar
with the matter said.

NBC Universal is the second major iTunes supplier recently to have a
rift with Apple over pricing and packaging matters. In July, the
Universal Music Group of Vivendi, the world's biggest music
corporation, said it would not renew its long-term contract with
iTunes. Instead, Universal Music said it would market music to Apple
at will, which would allow it to remove its songs from iTunes on short
notice.

The action by Jeff Zucker, NBC Universal's chief executive, will not
have an immediate impact on iTunes. The current two-year deal extends
through December, so a vast video catalog — some 1,500 hours of NBC
Universal's news, sports and entertainment programming — will remain
available on iTunes at least until then.

Among the most popular NBC Universal shows available for sale on
iTunes are "Battlestar Galactica," "The Office" and "Heroes." The
company has been talking to iTunes about offering Universal movies,
but has not done so to date because of piracy concerns.

The two companies could still reach an agreement on a new contract
before their current deal expires. While each side has so far refused
to budge, the talks will continue and have been free of acrimony, the
person familiar with the matter said.

But the defiant moves by NBC Universal and Universal Music could
embolden other media companies that have been less than thrilled with
Apple's policies. NBC Universal was the second company to sign an
agreement with Apple to sell content on iTunes, and its contract
stipulated that Apple receive notice of plans to cancel 90 days before
the expiration date. Otherwise, the deal would automatically renew
according to the original terms.

Assuming similar provisions in deals negotiated with media companies
like CBS, Discovery and the News Corporation, a parade of 90-day
windows will be coming due.

A move by NBC Universal to walk away or withdraw a large amount of
content would probably hobble Apple's efforts to move deeper into the
sale of video-focused consumer electronics like the iPhone and a new
class of iPods. While Apple's early efforts in this area depended on
music to fuel sales, analysts say video is what will drive much of
Apple's retail business in the future.

The iTunes service wields incredible power in the music business,
since it accounts for more than 76 percent of digital music sales. And
its influence is on the rise: Apple recently passed Amazon to become
the third-biggest seller of music over all, behind Wal-Mart and Best
Buy, according to the market research firm NPD.

But the sale of video online is still at a nascent stage. Media giants
like NBC Universal are aggressively trying to move into the business —
in part to avoid the piracy that has plagued music companies — but the
revenue they earn from online video sales does not yet have a material
impact on their financial performances.

So some media companies feel they have the upper hand: Apple, for now
at least, needs their content more than they need Apple. And there are
an array of companies — like Amazon, Wal-Mart, Microsoft and Sony —
that would love to have NBC Universal as a partner to muscle in on
Apple's turf.

Then there is NBC Universal's own Hulu.com, a venture in partnership
with the News Corporation to build a video portal to compete with
YouTube.

The risks that media companies face in removing content from
well-known Web sites involve perception and promotion. NBC Universal
could anger consumers by preventing them from easily watching shows
and movies in the most popular way — through iTunes and the iPod.
Television networks and movie studios have vigorously tried to avoid
being branded with the same anticonsumer sentiment that has worked
against the record labels.

And because iTunes is so popular, NBC Universal would lose an
increasingly important way of marketing entertainment products,
particularly fledgling television shows, to consumers.

For months, most media companies have grumbled that Apple underprices
video and audio content as a way to propel sales of a much more
significant profit center: iPods and related merchandise. (One
noteworthy abstainer from the grumbling is the Walt Disney Company,
which has Apple's chief executive, Steven P. Jobs, as a board member.)

The iTunes service has sold songs for 99 cents each since its
beginning four years ago, except for the recent introduction of songs
without copy protection. Episodes of television shows sell for $1.99,
with movies priced at $9.99.

NBC Universal and other companies say they want to increase prices by
packaging content— say an episode of "The Office" with the movie "The
40- Year-Old Virgin," because they both star the comedian Steve
Carell.

In the past, Apple has argued that a range of pricing would complicate
the iTunes experience and squelch demand.