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CHAPTER THIRTY-ONE THE iTUNES STORE
I’m the Pied Piper



Warner Music

At the beginning of 2002 Apple faced a challenge. The seamless connection between your iPod, iTunes software, and computer made it easy to manage the music you already owned. But to get new music, you had to venture out of this cozy environment and go buy a CD or download the songs online. The latter endeavor usually meant foraying into the murky domains of file-sharing and piracy services. So Jobs wanted to offer iPod users a way to download songs that was simple, safe, and legal.

The music industry also faced a challenge. It was being plagued by a bestiary of piracy services—Napster, Grokster, Gnutella, Kazaa—that enabled people to get songs for free. Partly as a result, legal sales of CDs were down 9% in 2002.

The executives at the music companies were desperately scrambling, with the elegance of second-graders playing soccer, to agree on a common standard for copy-protecting digital music. Paul Vidich of Warner Music and his corporate colleague Bill Raduchel of AOL Time Warner were working with Sony in that effort, and they hoped to get Apple to be part of their consortium. So a group of them flew to Cupertino in January 2002 to see Jobs.

It was not an easy meeting. Vidich had a cold and was losing his voice, so his deputy, Kevin Gage, began the presentation. Jobs, sitting at the head of the conference table, fidgeted and looked annoyed. After four slides, he waved his hand and broke in. “You have your heads up your asses,” he pointed out. Everyone turned to Vidich, who struggled to get his voice working. “You’re right,” he said after a long pause. “We don’t know what to do. You need to help us figure it out.” Jobs later recalled being slightly taken aback, and he agreed that Apple would work with the Warner-Sony effort.

If the music companies had been able to agree on a standardized encoding method for protecting music files, then multiple online stores could have proliferated. That would have made it hard for Jobs to create an iTunes Store that allowed Apple to control how online sales were handled. Sony, however, handed Jobs that opportunity when it decided, after the January 2002 Cupertino meeting, to pull out of the talks because it favored its own proprietary format, from which it would get royalties.

“You know Steve, he has his own agenda,” Sony’s CEO Nobuyuki Idei explained to Red Herring editor Tony Perkins. “Although he is a genius, he doesn’t share everything with you. This is a difficult person to work with if you are a big company. . . . It is a nightmare.” Howard Stringer, then head of Sony North America, added about Jobs: “Trying to get together would frankly be a waste of time.”

Instead Sony joined with Universal to create a subscription service called Pressplay. Meanwhile, AOL Time Warner, Bertelsmann, and EMI teamed up with RealNetworks to create MusicNet. Neither would license its songs to the rival service, so each offered only about half the music available. Both were subscription services that allowed customers to stream songs but not keep them, so you lost access to them if your subscription lapsed. They had complicated restrictions and clunky interfaces. Indeed they would earn the dubious distinction of becoming number nine on PC World’s list of “the 25 worst tech products of all time.” The magazine declared, “The services’ stunningly brain-dead features showed that the record companies still didn’t get it.”

At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:

From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we’d be out of business. If it weren’t protected, there’d be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there’s a simpler reason: It’s wrong to steal. It hurts other people. And it hurts your own character.



He knew, however, that the best way to stop piracy—in fact the only way—was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting. “We believe that 80% of the people stealing stuff don’t want to be, there’s just no legal alternative,” he told Andy Langer of Esquire. “So we said, ‘Let’s create a legal alternative to this.’ Everybody wins. Music companies win. The artists win. Apple wins. And the user wins, because he gets a better service and doesn’t have to be a thief.”

So Jobs set out to create an “iTunes Store” and to persuade the five top record companies to allow digital versions of their songs to be sold there. “I’ve never spent so much of my time trying to convince people to do the right thing for themselves,” he recalled. Because the companies were worried about the pricing model and unbundling of albums, Jobs pitched that his new service would be only on the Macintosh, a mere 5% of the market. They could try the idea with little risk. “We used our small market share to our advantage by arguing that if the store turned out to be destructive it wouldn’t destroy the entire universe,” he recalled.

Jobs’s proposal was to sell digital songs for 99 cents—a simple and impulsive purchase. The record companies would get 70 cents of that. Jobs insisted that this would be more appealing than the monthly subscription model preferred by the music companies. He believed that people had an emotional connection to the songs they loved. They wanted to own “Sympathy for the Devil” and “Shelter from the Storm,” not just rent them. As he told Jeff Goodell of Rolling Stone at the time, “I think you could make available the Second Coming in a subscription model and it might not be successful.”

Jobs also insisted that the iTunes Store would sell individual songs, not just entire albums. That ended up being the biggest cause of conflict with the record companies, which made money by putting out albums that had two or three great songs and a dozen or so fillers; to get the song they wanted, consumers had to buy the whole album. Some musicians objected on artistic grounds to Jobs’s plan to disaggregate albums. “There’s a flow to a good album,” said Trent Reznor of Nine Inch Nails. “The songs support each other. That’s the way I like to make music.” But the objections were moot. “Piracy and online downloads had already deconstructed the album,” recalled Jobs. “You couldn’t compete with piracy unless you sold the songs individually.”

At the heart of the problem was a chasm between the people who loved technology and those who loved artistry. Jobs loved both, as he had demonstrated at Pixar and Apple, and he was thus positioned to bridge the gap. He later explained:

When I went to Pixar, I became aware of a great divide. Tech companies don’t understand creativity. They don’t appreciate intuitive thinking, like the ability of an A&R guy at a music label to listen to a hundred artists and have a feel for which five might be successful. And they think that creative people just sit around on couches all day and are undisciplined, because they’ve not seen how driven and disciplined the creative folks at places like Pixar are. On the other hand, music companies are completely clueless about technology. They think they can just go out and hire a few tech folks. But that would be like Apple trying to hire people to produce music. We’d get second-rate A&R people, just like the music companies ended up with second-rate tech people. I’m one of the few people who understands how producing technology requires intuition and creativity, and how producing something artistic takes real discipline.



Jobs had a long relationship with Barry Schuler, the CEO of the AOL unit of Time Warner, and began to pick his brain about how to get the music labels into the proposed iTunes Store. “Piracy is flipping everyone’s circuit breakers,” Schuler told him. “You should use the argument that because you have an integrated end-to-end service, from iPods to the store, you can best protect how the music is used.”

One day in March 2002, Schuler got a call from Jobs and decided to conference-in Vidich. Jobs asked Vidich if he would come to Cupertino and bring the head of Warner Music, Roger Ames. This time Jobs was charming. Ames was a sardonic, fun, and clever Brit, a type (such as James Vincent and Jony Ive) that Jobs tended to like. So the Good Steve was on display. At one point early in the meeting, Jobs even played the unusual role of diplomat. Ames and Eddy Cue, who ran iTunes for Apple, got into an argument over why radio in England was not as vibrant as in the United States, and Jobs stepped in, saying, “We know about tech, but we don’t know as much about music, so let’s not argue.”

Ames had just lost a boardroom battle to have his corporation’s AOL division improve its own fledgling music download service. “When I did a digital download using AOL, I could never find the song on my shitty computer,” he recalled. So when Jobs demonstrated a prototype of the iTunes Store, Ames was impressed. “Yes, yes, that’s exactly what we’ve been waiting for,” he said. He agreed that Warner Music would sign up, and he offered to help enlist other music companies.

Jobs flew east to show the service to other Time Warner execs. “He sat in front of a Mac like a kid with a toy,” Vidich recalled. “Unlike any other CEO, he was totally engaged with the product.” Ames and Jobs began to hammer out the details of the iTunes Store, including the number of times a track could be put on different devices and how the copy-protection system would work. They soon were in agreement and set out to corral other music labels.

Herding Cats

The key player to enlist was Doug Morris, head of the Universal Music Group. His domain included must-have artists such as U2, Eminem, and Mariah Carey, as well as powerful labels such as Motown and Interscope-Geffen-A&M. Morris was eager to talk. More than any other mogul, he was upset about piracy and fed up with the caliber of the technology people at the music companies. “It was like the Wild West,” Morris recalled. “No one was selling digital music, and it was awash with piracy. Everything we tried at the record companies was a failure. The difference in skill sets between the music folks and technologists is just huge.”

As Ames walked with Jobs to Morris’s office on Broadway he briefed Jobs on what to say. It worked. What impressed Morris was that Jobs tied everything together in a way that made things easy for the consumer and also safe for the record companies. “Steve did something brilliant,” said Morris. “He proposed this complete system: the iTunes Store, the music-management software, the iPod itself. It was so smooth. He had the whole package.”

Morris was convinced that Jobs had the technical vision that was lacking at the music companies. “Of course we have to rely on Steve Jobs to do this,” he told his own tech vice president, “because we don’t have anyone at Universal who knows anything about technology.” That did not make Universal’s technologists eager to work with Jobs, and Morris had to keep ordering them to surrender their objections and make a deal quickly. They were able to add a few more restrictions to FairPlay, the Apple system of digital rights management, so that a purchased song could not be spread to too many devices. But in general, they went along with the concept of the iTunes Store that Jobs had worked out with Ames and his Warner colleagues.

Morris was so smitten with Jobs that he called Jimmy Iovine, the fast-talking and brash chief of Interscope-Geffen-A&M. Iovine and Morris were best friends who had spoken every day for the past thirty years. “When I met Steve, I thought he was our savior, so I immediately brought Jimmy in to get his impression,” Morris recalled.

Jobs could be extraordinarily charming when he wanted to be, and he turned it on when Iovine flew out to Cupertino for a demo. “See how simple it is?” he asked Iovine. “Your tech folks are never going to do this. There’s no one at the music companies who can make it simple enough.”

Iovine called Morris right away. “This guy is unique!” he said. “You’re right. He’s got a turnkey solution.” They complained about how they had spent two years working with Sony, and it hadn’t gone anywhere. “Sony’s never going to figure things out,” he told Morris. They agreed to quit dealing with Sony and join with Apple instead. “How Sony missed this is completely mind-boggling to me, a historic fuckup,” Iovine said. “Steve would fire people if the divisions didn’t work together, but Sony’s divisions were at war with one another.”

Indeed Sony provided a clear counterexample to Apple. It had a consumer electronics division that made sleek products and a music division with beloved artists (including Bob Dylan). But because each division tried to protect its own interests, the company as a whole never got its act together to produce an end-to-end service.

Andy Lack, the new head of Sony music, had the unenviable task of negotiating with Jobs about whether Sony would sell its music in the iTunes Store. The irrepressible and savvy Lack had just come from a distinguished career in television journalism—a producer at CBS News and president of NBC—and he knew how to size people up and keep his sense of humor. He realized that, for Sony, selling its songs in the iTunes Store was both insane and necessary—which seemed to be the case with a lot of decisions in the music business. Apple would make out like a bandit, not just from its cut on song sales, but from driving the sale of iPods. Lack believed that since the music companies would be responsible for the success of the iPod, they should get a royalty from each device sold.

Jobs would agree with Lack in many of their conversations and claim that he wanted to be a true partner with the music companies. “Steve, you’ve got me if you just give me something for every sale of your device,” Lack told him in his booming voice. “It’s a beautiful device. But our music is helping to sell it. That’s what true partnership means to me.”

“I’m with you,” Jobs replied on more than one occasion. But then he would go to Doug Morris and Roger Ames to lament, in a conspiratorial fashion, that Lack just didn’t get it, that he was clueless about the music business, that he wasn’t as smart as Morris and Ames. “In classic Steve fashion, he would agree to something, but it would never happen,” said Lack. “He would set you up and then pull it off the table. He’s pathological, which can be useful in negotiations. And he’s a genius.”

Lack knew that he could not win his case unless he got support from others in the industry. But Jobs used flattery and the lure of Apple’s marketing clout to keep the other record labels in line. “If the industry had stood together, we could have gotten a license fee, giving us the dual revenue stream we desperately needed,” Lack said. “We were the ones making the iPod sell, so it would have been equitable.” That, of course, was one of the beauties of Jobs’s end-to-end strategy: Sales of songs on iTunes would drive iPod sales, which would drive Macintosh sales. What made it all the more infuriating to Lack was that Sony could have done the same, but it never could get its hardware and software and content divisions to row in unison.

Jobs tried hard to seduce Lack. During one visit to New York, he invited Lack to his penthouse at the Four Seasons hotel. Jobs had already ordered a breakfast spread—oatmeal and berries for them both—and was “beyond solicitous,” Lack recalled. “But Jack Welch taught me not to fall in love. Morris and Ames could be seduced. They would say, ‘You don’t get it, you’re supposed to fall in love,’ and they did. So I ended up isolated in the industry.”

Even after Sony agreed to sell its music in the iTunes Store, the relationship remained contentious. Each new round of renewals or changes would bring a showdown. “With Andy, it was mostly about his big ego,” Jobs claimed. “He never really understood the music business, and he could never really deliver. I thought he was sometimes a dick.” When I told him what Jobs said, Lack responded, “I fought for Sony and the music industry, so I can see why he thought I was a dick.”

Corralling the record labels to go along with the iTunes plan was not enough, however. Many of their artists had carve-outs in their contracts that allowed them personally to control the digital distribution of their music or prevent their songs from being unbundled from their albums and sold singly. So Jobs set about cajoling various top musicians, which he found fun but also a lot harder than he expected.

Before the launch of iTunes, Jobs met with almost two dozen major artists, including Bono, Mick Jagger, and Sheryl Crow. “He would call me at home, relentless, at ten at night, to say he still needed to get to Led Zeppelin or Madonna,” Ames recalled. “He was determined, and nobody else could have convinced some of these artists.”

Perhaps the oddest meeting was when Dr. Dre came to visit Jobs at Apple headquarters. Jobs loved the Beatles and Dylan, but he admitted that the appeal of rap eluded him. Now Jobs needed Eminem and other rappers to agree to be sold in the iTunes Store, so he huddled with Dr. Dre, who was Eminem’s mentor. After Jobs showed him the seamless way the iTunes Store would work with the iPod, Dr. Dre proclaimed, “Man, somebody finally got it right.”

On the other end of the musical taste spectrum was the trumpeter Wynton Marsalis. He was on a West Coast fund-raising tour for Jazz at Lincoln Center and was meeting with Jobs’s wife, Laurene. Jobs insisted that he come over to the house in Palo Alto, and he proceeded to show off iTunes. “What do you want to search for?” he asked Marsalis. Beethoven, the trumpeter replied. “Watch what it can do!” Jobs kept insisting when Marsalis’s attention would wander. “See how the interface works.” Marsalis later recalled, “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 fascinat............
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