Uh, what the hell is Universal Music thinking? The hot rumor right now is that they’re going to pull their catalog off of iTunes – you know that tiny online music store that recently became the 3rd largest music retailer – of any kind – in the world.

Clearly they’re pissed about something. Maybe Steve Jobs forgot to send over some complimentary iPhones? More likely they’re just fed up with constantly demanding new terms be reached on iTunes pricing, only to always back down the power of Jobs and iTunes.

If Universal actually does this, I don’t think I’m going out on a limb to say they’ll regret it. The reason all the music companies eventually fall in line with iTunes despite the big talk is simply because iTunes is so huge that it has all the leverage. Universal better have something up its sleeve – like maybe giving away their entire catalog for free – or else those declining CD sales are going to be the least of their problems.

Or maybe this is just the new shock-and-awe negotiation tactic since obviously nothing else they’ve done has worked so far. The only problem? I don’t think any of their fellow music companies will fall in line behind them.

The Drudge Report had the initial scoop on this (up top in red), and now The Wall Street Journal is reporting it as well.

[UPDATE]: As the first commenter points out, The Wall Street Journal follow-up suggests that UMG wouldn’t pull its music right now, it just seeks to possibly renew with a shorter term deal maybe so in the future they can perhaps – pull their music from iTunes.

[UPDATE 2]: UMG could want the month-to-month deal so they could potentially ink exclusive deals with iTunes rivals according to Reuters.

“Universal Music Group, the world’s largest music company, has declined to sign a long-term deal with Apple Inc.’s iTunes music store, leaving open the possibility for exclusive deals with other services, an industry source said on Sunday.”