Steve’s negotiating challenge was considerable. He needed every leader of the big five labels—Universal, EMI, Sony, BMG, and Warner—to sign on. He was probably right in presuming that any online store that couldn’t claim a huge selection across every major label was doomed to fail. And he was charging a stiff price in return for his end-to-end solution: 30 percent of every sale made on the iTunes Music Store.
Fortunately for Steve, he quickly found an ally: Roger Ames, the head of Warner Music, whom he knew through an executive at AOL named Barry Schuler. Ames, an unpretentious realist in a business that was then still floating on the fumes of past profits and successes, saw clearly what Warner could accomplish on its own technologically: “Absolutely nothing,” he says. “We didn’t have any real technologists at Warner. It’s a record company, not a tech company!” Convinced that Steve had the only reasonable solution to where the industry was headed, Ames introduced Steve to the leaders of the four other major record studios, starting with those he thought would be most receptive. Their progress was steady, if bumpy. The reluctance of the record company executives was palpable and understandable. Some still denied that digital distribution of music was inevitable, while the more pragmatic feared that they would lose pricing power over their own products by ceding distribution to an outside industry that they didn’t quite understand or trust. Steve listened to them, and modified the store and the digital protections on singles to their liking. He knew he couldn’t just impose a solution on the industry.
Steve also knew how to get what he wanted, and he negotiated with both carrot and stick. While he worked with the studio chiefs and led them to see that he truly did have a safe and complete solution designed for them by the very best technologists, he was also sure to remind them that the digital onslaught they were trying to ignore was inevitable and irrepressible. If they were worried about losing control, well, he invited them to just wait and see what might be wrought by the smarter, sneakier successors to Napster!
Of all the record company heads, Andy Lack at Sony was the most suspicious. Sony had its own consumer electronics division, with its own approach to selling portable digital music players that used a completely different compression and encryption scheme. Furthermore, everything in Lack’s decades of experience as a media executive at NBC and other places told him that iPod sales would soar if Apple could offer a full-service music store, and that the company would probably even sell millions more Macs as a result. If that was the case, why weren’t the music companies the ones getting a slice of Steve’s business, rather than the other way around? Other studio heads sensed this as well, and they—or the CEOs of their parent companies—made equity offers that would have created partnerships that went deeper than mere revenue-sharing on music tracks. But these were halfhearted, and Steve believed that the longer he held out, the more the record companies would see that they needed his solution.
Finally, Lack caved. On April 23, 2003, the iTunes Music Store opened for business with an inventory of 200,000 songs. During the very first week customers downloaded a million tracks, and by the end of the year Apple had sold more than 25 million songs.
JUST AS LACK had predicted, iPod sales soared, to the point where several of Steve’s lieutenants believed that the market of existing Macintosh users was nearing saturation. They argued that the next logical step in the expansion of the iPod was to create iTunes application software for Windows—which of course meant opening the iTunes Music Store to every computer user in the world, which was exactly what Steve had promised not to do.
Steve initially resisted the idea, for reasons that were both strategic and emotional. Steve had always wanted Macs to have distinctive features that consumers couldn’t get from a Windows PC. Also, he still wanted to see if the iPod itself might begin to drive up Mac sales—that part of Lack’s prediction had not yet come true. But Avie, Sina, Ruby, Fadell, and others argued that iTunes for Windows coupled with the iPod would give hundreds of millions of PC users a means to taste for themselves Apple’s more inviting approach to personal computing. The idea that the iPod could be a diminutive Trojan Horse to help Apple finally begin to win back some market share for Macintosh personal computers really intrigued Steve. After all, the team reminded him, wasn’t he the one who was always saying that if the company could pick up just a few points of PC market share, revenues would soar? Furthermore, even though the expansion would mean that PC users would use iTunes software on Windows, Apple would still control their entire digital music experience, from its iTunes software to its store to its iPod. As it had with iMovie, the team wore Steve down—quickly, this time—and convinced him to shift direction. Changing his mind now would pay off as much as it had then.
Just a few months earlier Steve had cajoled the music label chiefs into signing off on that “little,” Mac-only test of the iTunes Music Store. Now here he came again, wanting to expand the experiment to, oh, every other personal computer user in the entire world. He had to get their permission, because the terms they’d agreed to applied only to the smaller universe of Mac users. But in the few months in between, they had seen that what Steve had forecast was true: consumers really would forgo piracy if given an easy way to acquire digital tracks at a cost that seemed fair. This time they put up minimal resistance; their business was headed in the direction Steve had predicted, whether they liked it or not. The iTunes Music Store gave them a way to like it a little better than the alternatives.
Once again, Sony’s Andrew Lack felt he had no choice but to go along with others, even though he felt duped by the speed with which Steve expanded the iTunes Music Store’s market. Despite Sony’s ample content and history of great consumer electronics devices, its business units were stubbornly independent operating divisions that couldn’t possibly collaborate well enough to create any kind of “whole widget” alternative. Years later, Lack still bemoaned the weakness he thought the music studios had displayed in their negotiations with Steve. “The iPod was empty without the music,” Lack has said. “I felt strongly that without a dual revenue stream [in which Apple had to give a cut of iPod sales back to the recording companies] the music business was going to struggle. If they’d stuck together, there was a chance they could have gotten somewhere. It’s my greatest regret.”
On October 16, 2003, Steve announced that Apple was offering free downloads of the iTunes application for Windows PCs. For some of the Mac faithful, this was as shocking as Microsoft’s investment back in 1997. Most, however, saw it as a vindication of their faith that Apple software, and its entire approach to personal computing, was far superior to anything offered by the Windows juggernaut. Steve knew it, too; he gleefully made part of his announcement under a slide reading “Hell froze over.”
Within three days, a million Windows PC users had downloaded iTunes and purchased a million songs via the iTunes Music Store. By the end of the year, more customers were downloading music from Apple through their Windows computers than through Macs. What the team was beginning to call “the Apple experience” had begun to infect the world of Windows.
It is so hard to remember, given Apple’s string of hits, the resulting ubiquity of its later products, and the dominant role it eventually assumed in our culture, that this rise was entirely unexpected, and a surprise even to the people who engineered it. One little thing led to another. One success, one particular challenge, could spur thoughts about another product, or a different iteration of an existing product, or a whole new channel of revenue. As Steve liked to say, “You can only connect the dots of how things really happened in hindsight.” Eddy Cue remembers a day in late 2003 when he was waiting for a plane and he looked around the airport lounge at the other passengers waiting with him. Perhaps a dozen folks were listening to music on iPods, earbuds in place; a handful of people were working on PowerBooks with the distinctive white apple silhouette glowing from the back of the lid; and only one guy was tapping away at a laptop PC. “Holy shit, I thought,” Cue recalls. “We’re really onto something here. We didn’t really have time to lift our heads up and look around, you know? But there it was. It was cool.”