By Kenneth Li

NEW YORK (Reuters) - NBC Universal has decided not to renew its contract to sell television shows on iTunes, becoming the second major media company to challenge Apple Inc's dominance in digital entertainment.

Apple said on Friday that NBC had sought to more than double the wholesale rate for each show, which Apple said would have forced its iTunes online store to raise what it charged consumers to $4.99 per TV show episode from $1.99.

"We are disappointed to see NBC leave iTunes because we would not agree to their dramatic price increase," Eddy Cue, Apple's vice president of iTunes, said in a statement.

NBC Universal disputed Apple's claim it had demanded double the wholesale price for its shows, adding that its focus was on more flexibility including the ability to package shows together.

Apple said it has decided not to offer shows for download from NBC's upcoming season beginning in September, including such popular series as "Heroes." NBC also disputed this and said its new shows would be available through the duration of the contract, which expires at the end of December.

NBC Universal, which is controlled by General Electric Co , is the No. 1 supplier of digital video to iTunes.

Viacom Inc , Walt Disney Co , Time Warner Inc and News Corp also supply television programs to iTunes.

NBC Universal's decision not to renew the contract is the latest example of tension between Apple, the owner of the most popular storefront for digital entertainment online, and media companies seeking more control over pricing.

Vivendi's Universal Music Group declined to sign a long-term deal with iTunes, leaving open the possibility for exclusive deals with other services, a source told Reuters in July.

NBC Universal is emboldened by the October test debut of Hulu, its advertising-supported online-video joint venture with News Corp , media and technology industry analysts said.

"The TV folks are saying 'We're all about advertising revenue. That's how we understand how to make money,"' Gartner analyst Mike McGuire said. "They're getting ready to try to drive people to Hulu."

NBC Universal and other video programming owners are attempting to build stronger online advertising businesses by offering many of their top shows on the Internet for free.

APPLE'S MEDIA FUTURE IN QUESTION

NBC Universal notified Apple of its decision late on Thursday, said a source familiar with the matter on Friday, confirming a New York Times report.

The media conglomerate is also pushing for better piracy controls, such as the ability to prevent pirated material from being uploaded to Apple's popular iPod, the source said, adding that discussions between the two companies are expected to continue through December when the contract ends.

NBC Universal says it accounts for about 40 percent of iTunes downloads. Apple said NBC Universal, which provided three of its 10 best-selling shows last season, accounted for 30 percent of sales of iTunes TV shows.

Apple is also facing a slew of iTunes rivals, including Amazon.com , which is expected to launch its music service in September.

The moves could hurt iTunes' long-term prospects as a destination for video, Forrester analyst James McQuivey said.

"NBC doesn't feel like iTunes is critical to its future business," McQuivey said. "And Apple doesn't feel like NBC is critical to their business going forward -- I think they're wrong."

He added: "Apple's ambitions for a greater empire is definitely undermined if 30 percent of content viewers want to download is suddenly gone. That impacts not just the sale of TV shows, but also their ambitions to sell more Apple TVs and even the iPhone."

(Additional reporting by Lewis Krauskopf)
© Copyright 2007 Reuters.