Apple's attempt to make Europe's independent labels agree to an unattractive deal to get their music onto iTunes Music Store may fail, industry insiders say.

Anthony Thornton, album reviews editor for the NME, told Macworld UK: "This is in a sense a parallel with what happened with MTV. MTV wanted to get all the independents to sign individually-negotiated video-licensing agreements that reduced royalty payments by a claimed 50 per cent in a classic divide and rule measure," he explained.

Hundreds of independents across Europe refused the deal and insisted MTV stop playing their videos after the then-current agreement ended March 31. Catherine Bell, Chrysalis Music Group’s general manager of business affairs then said: "MTV would not exist without music and yet it doesn't recognize the very people that create it."

Launching the service in London yesterday, Apple CEO Steve Jobs stressed the reasons Apple is engaged in offering music for sale: "One of the reasons we are doing this is because we love music too. It all comes down to artists – it's about the music. We love having exclusive content; we love working with the artists," he enthused.

Will Apple be hard to crack?

The independent labels account for 25 per cent of UK music sales and 22 per cent of Europe's sales. More independent label artists were nominated for Brit Awards last year than artists from EMI, Warners and Sony. Independent band Franz Ferdinand has sold over one million albums in the US and is currently shifting 20,000 albums each day, sources told Macworld.

Jobs yesterday claimed that "dozens of independent labels are signing up", adding that "the independents want their tracks on iTunes because it's the biggest and best service in the world." MTV is the biggest video programming service in the world.

In March 2004, when faced with the threat of being unable to show videos representing such an important section of the music industry, MTV eventually relented, returned to the negotiating table and negotiated a collective agreement with Europe's indie labels.

The indies welcome the launch of digital music services such as iTunes Music Store – but with a caveat: "We like iTunes but we need to make sure we get acceptable terms," Simon Wheeler of Beggars Banquet told Macworld.

In a similar attempt to MTV's failed experiment, Apple is also trying to force all European independent labels to agree individual, rather than collective licensing deals to get their music onto its service.

The US experience

A little history: When Apple launched iTunes in the US, it approached the independent labels with a royalty rate that it's alleged it claimed was the same as that received by the major labels.

Independent-label sources say they then found out this was not the case, though "one major" had agreed to the same deal, they said. However, Apple in Europe is offering what the independents believe to be a "significantly lower royalty rate" than the majors get.

Wheeler explained that Apple intends locking these labels into a three-year non-negotiable deal under which iTunes Music Store would pay the artists a fixed royalty.

The difficulty here is that Apple also insists on total control of the retail price it charges, meaning it could potentially raise end-user prices at any point in the next three years, but the indies would still receive the existing royalty.

This also limits the labels should they want to support new artists with cut-price song downloads, as Apple's system does not allow them to exercise control of end-user prices. Apple is also not allowing regular price reviews.

The impact of this impasse is clear to anyone attempting to buy music on iTunes. Numerous reader reports on Macworld's Forum cite listed tracks that are unavailable, key bands missing form the service, such as The White Stripes, and a variety of other bugs that limit the experience.

Anthony Thornton, album reviews editor for the NME told Macworld UK: "Some music that's missing from Apple's service now are tracks you'd expect to find there," but added, "I think we are going to see this resolved fairly soon."

Pointing to the MTV debacle, he said, "I'd be very surprised if AIM [the Association of Independent Music] does not negotiate a collective deal."

Major labels muscle-in
Apple seems more willing to negotiate with the majors, and this also has risks. Wheeler told Macworld UK yesterday: "I think some of the major labels are taking advantage here, as they are forcing Apple to work on the slimmest of margins." The fear is that the profits Apple makes from selling independent tracks will effectively subsidize its major label catalogue.

AIM chairman and CEO Alison Wenham said: "We welcome the arrival of iTunes in the UK, but are disappointed that our members have been unable to agree terms for licensing their repertoire to the service.

Apple's hard-nosed negotiation with the labels has already seen some music industry insiders brand the company "a monopolistic American company trying to dictate terms."

"It's strange, because in the computer industry Apple is the indies," one source complained.

Success in Europe needs local music

Apple could be risking its opportunity to gain market advantage through the dispute with the independent labels here. A Forrester Research report released last night stressed the importance of carrying locally generated music; and OD2, the old and new Napster, Wipppit and Sony Connect have all successfully reached deals to do just that with AIM.

"Companies like Germany's Viva music TV channel have shown that offerings gain wider appeal when they include local artists. In Europe, more than half of music sold is of European origin; offerings must reflect this. Services will need to employ local languages, emphasize support for local artists and support multiple payment systems," the report warns.

The dispute currently means repertoire from Basement Jaxx, Franz Ferdinand, Dizzee Rascal, Mr. Scruff, White Stripes, Lemon Jelly, Coldcut, Hexstatic, Roots Manuva, Jakatta, Deepest Blue, Bent, Carla Bruni, Corneille, Cinematic Orchestra and hundreds of other artists is unavailable through Apple's service.

The absence of tracks from the independents has caused some commentators to question Apple's claim to carry 700,000 tracks on its iTunes service. It's alleged it told some analysts and guests differently:

How many tracks?

Speaking to the MacObserver, Jupiter Research analyst Mark Mulligan reportedly said: "700,000 is the cumulative total. I think you're talking about 300,000 to 400,000 in each of the given markets, is what we were told." The MacObserver story has now been withdrawn.

However, one analyst named in the MacObserver report, Informa Media's Simon Dyson spoke with Macworld to say: "I haven't seen any official figures but I guess the sites opened with around 550,000 available tracks".

Dyson said he was "surprised" that no agreement could be reached before the launch, as "Apple wouldn't want to concede any ground to the other services. I'm sure when Sony launches Connect next week it will play on the fact that it has the indies on board. Apple will certainly want the indie labels to join soon.

"I'm guessing there will probably be a bit of give and take by both sides fairly soon to resolve the problem. Both parties need each other and it's in both their interests to sort it out quickly," he said.

Macworld UK will bring you further developments in this story as they emerge.