By James Mowery

It appears that the war of words that took place between Sony and Apple is continuing to escalate at a hot clip — Sony is now threatening to pull out of iTunes altogether, taking along all of the recording artists that perform under their label. But that is only the beginning.

If Sony does happen to pull out of iTunes, it would be a potentially devastating blow to Apple’s music endeavors. Considering that Apple is aiming to be the digital platform of the future, where everyone can go to get their digital entertainment needs met, this could be the beginning of a revolt against Apple for what what Sony has called “ransom.”

Did Apple just create a monster?

I think they did, for reasons most probably haven’t considered. And while Sony might not be in a position to challenge Apple today, it doesn’t mean that Sony, along with some friends, couldn’t make Apple suffer dearly in the future.

How We Got Here

The reason for the rapid deterioration of Sony and Apple’s relationship can be tracked back to a few weeks ago when Apple denied Sony entry into the App Store.

Sony intended on releasing an application that would enable users to view and purchase e-book content from Sony’s Ebookstore, but at the last moment, Apple told Sony that they could not release their application into the App Store. Apple stated that it violated its terms of service. The controversial part, however, was that Barnes & Noble and Amazon already had applications in the App Store that offered similar functionality to Sony’s application.

Sony had the misfortune of being on the receiving end of a new enforcement of a rule that prevents applications from selling e-books within itself. This, of course, outraged Sony. They made their displeasure well-known on the Internet; consequently, the media jumped on the opportunity to publicize it. And things are not getting any better.

Where We Stand Now

Sony isn’t happy with how Apple is managing its dealings with third parties (and it must be said that quite a few developers agree). The company feels that Apple is taking too much and not giving enough leeway. Honestly, Sony might have a valid complaint. That said, if you want to play in Apple’s back yard, you have to pay the price to do so.

But Sony is growing tired of the status quo. It’s gotten to the point where a serious threat has been made, and its impacts could be huge.

Sony threatened to remove itself from the iTunes music store. If this were done, it would take away a significant portion of music from Apple, and it would take many high profile music artists along with it. It would also disrupt Apple’s ability to sell music to the masses. I can’t even begin to think about the implications it would have if Apple is actually planning on creating a music streaming service…

Of course, threatening to remove oneself from the iTunes Marketplace alone is crazy. It is a serious source of revenue for everyone involved in the music industry (although how much is up for debate), and Sony is no different — Sony realizes this. But the Japanese corporation might have something up its sleeve to compete with iTunes. They call it Music Unlimited.

iTunes Killer?

From what I gather, Sony’s Music Unlimited is a service that enables consumers to stream music to devices like Sony TVs, PlayStation 3 consoles, PSPs, Blu-ray players, and phones. The service, which is already available in Europe (soon in Australia), has access to over six-million tracks, which is impressive to say the least. Sony believes that it will provide a viable alternative to iTunes for consumers and to publishers.

If that comes true, Sony might pull its content from Apple’s stores.

Sony Computer Entertainment COO Michael Ephraim makes Sony’s intentions clear, even if it is a subtle threat.

If we do [prevail with Music Unlimited] then does Sony Music need to provide content to iTunes? Currently we do. We have to provide it to iTunes as that’s the format right now. Publishers are being held to ransom by Apple and they are looking for other delivery systems, and we are waiting to see what the next three to five years will hold.

Sony states that their service is better because its users will be able to access their music from any device, as opposed to iTunes, which they say only allows music to be accessed on their devices. It should be pointed out, however, that this claim is not true: Apple now sells DRM-free music.

Regardless, Music Unlimited, alone, is not that interesting. However, if Sony convinces other music labels to switch to their service, provides those music labels more freedom and more profits, and persuades them to abandon Apple, Music Unlimited becomes a monumental service that is fully capable of shifting the music industry in Sony’s and the music industry’s favor overnight.

But Sony is taking it a step further.

PlayStation Suite

Sony is well known for its gaming division, which produces products like the PlayStation 3 and the PlayStation Portable. But whereas the company is great at producing gaming hardware, having a platform to distribute games is not. But that might change.

Enter PlayStation Suite.

PlayStation Suite will bring earlier games from the likes of the original PlayStation to portable platforms and phones (like the Samsung Galaxy and Motorola Defy). This also potential ties into Sony’s plans for a PSP-like phone, which the company has officially announced. And it might, if I understand correctly, give developers a platform to create and distribute new games.

This is interesting because Sony will, in a way, compete with Apple’s App Store (games on the App Store in particular). Mobile gaming has exploded in recent years, and the company who controls mobile gaming — which is currently Apple by a fair margin — will surely benefit in many ways.

Ephraim believes that Sony could be the one to take control:

We are not as closed as Apple is. It’s the first time in the gaming industry it’s non-proprietary. With the proliferation of devices, [PlayStation Suite] could be an indication of where things are going.

But all of this gets even more interesting, believe it or not.

Apple’s Greatest Threat Yet?

If you don’t know where I’m going with this by now, it is essentially a belief that Sony could consider competing directly with Apple in one of the most important aspects: the digital entertainment ecosystem.

Apple has an invaluable ecosystem that consists of music, movies, applications, and video games. It’s one of the biggest out there right now. But Sony also has significant control over a substantial portion of music, movies, and video games. If they remove this content from iTunes, they could hurt Apple’s business in more ways than one. Apple’s complete ecosystem suddenly becomes more like the Netflix of the television and movie industry — it is great, but it doesn’t have everything.

Sony could theoretically create its own digital ecosystem, and they could compete on the premise of openness. This would make Sony more Apple-like — in that Sony would take full control of the hardware, software, and distribution of content (and Sony also has the added benefit of influencing the actual content being made).

But, as I mentioned, the whole power here lies with Sony’s ability to cause great harm to the iTunes ecosystem.

Take Notice, Apple

Should Apple worry? If you think about the short-term, I don’t believe so.

But if we talk about a few years down the line, I think there are some serious concerns. The most important reason is that Sony has the support of the entertainment industry: the music industry and movie industry, in particular. If Sony could also convince third-party game developers to join their efforts by leveraging platforms like the PSP and the newly announced Android-based gaming platform as well — while also giving these developers a larger slice of the pie — they could could become even more powerful. The only missing piece would be third-party application developers (that is an article worth of discussion itself).

To wrap all of this up: if Sony creates a platform that steals away many third-party content sources (music, movies, games and applications), locks out Apple from having access to this content (which would be Sony’s ultimate revenge against Apple for the e-reader fiasco), and encourages third-party developers to join, they could have the ability to hurt Apple. But it really is impossible to know how much damage a move like this could cause.

Until then, Sony has to play by Apple’s rules. But things can change in the blink of an eye.