Apple's subscription prescription

Arik has expressed his views, but I can't help weighing in on the possibility of iPods that come pre-loaded with some or all of the labels' catalogs, or with an all-you-can-eat subscription so consumers can pay a monthly fee to get that music whenever they want. As we reported yesterday, don't hold your breath. Sources tell us that Steve Jobs hasn't really changed his tune on the merits of subscriptions, and doesn't believe consumers will pay much more than they already pay for iPods. I've written stories in the past about discussions of this sort, so don't doubt that somebody at the labels is talking to somebody at Apple. But I doubt the labels are going to license their music for anything close to the $20-per-iPod that Apple would be willing to pay, according to the Financial Times. And given the state of relations between Apple and the labels, there's more than enough complexities to prevent such a deal from happening.

That's too bad"”because such a deal could be good for everyone: the labels, Apple, musicians and, most importantly, consumers.

First, the labels. They would get some money from the millions of people who would like to carry around a few million songs in their pocket without having to fork out millions of dollars at the $.99-per-song iTunes store to do so. And with a protracted recession looking likely, now would be a great time to make honest people of as many music fans as possible"”before they start reconsidering whether to spend anything at all at iTunes in favor of spending nothing at piracy sites.

Apple could come out ahead as well. It would certainly bring in sales from the few million people who already favor subscriptions, and many more who would if these services worked on iPods. That would be a nice addition, at a time when iPod sales growth is expected to slip from 31% in 2007 to a measly 5% or so this year. I'd certainly buy one. I love my Rhapsody-to-Go service, so I carry an iPod for podcasts and audio books, and a Sansa for listening to music via Rhapsody. If Apple inked the rumored deal, it's safe to assume my Sansa's life would be in grave danger. I'd much rather carry only an iPod.

More after the break:

But who really needs to carry millions of songs in their pocket"”to essentially pay for songs they'll never listen to‾ That's been Apple's main argument against expanding beyond a la carte downloads: that subscriptions and similar services are not a good value, which is why the market remains so small. But for many people who actually use such services, this argument precisely misses the point. The fact is, you don't pay extra so you can get the songs you know you want. You pay extra for the songs you might want to hear once or five times but don't want to pay a buck to get, or more important, to be exposed to the vast universe of music you don't know. With Apple's marketing muscle and a slick new interface designed more for discovering music than for buying it, I'd bet Apple could single-handedly expand the size of the music subscription market by an order of magnitude.

In that sense, this represents a design challenge that would seem to be right up Apple's alley. "Getting to what you want (as with iTunes) isn't hard. Getting to what you don't know you want is far more important"”helping you find things you wouldn't find in a physical record store in a million years," says digital music pioneer Ted Cohen, who used to work at EMI.

 

He says the current iTunes is a "7-11 experience" - a convenient place to make basic transactions, but that's about it. "There's no sense of discovery, no sense of community," he says. "So this is an opportunity for Apple to create incredible stickiness"”to create the kind of community around iTunes that they have in computer world with the Mac. People love their iPods, but they don't feel that same connection that Mac lovers have for their Macs."

Of course, that stickiness is essential to Apple's strategy: to create products and services that are so helpful and elegant that folks are willing to commit to its universe of products"”even if it means locking themselves out of others to some degree. That's even more important at times like these, when many music experts outside of Cupertino think music is set to go through a drastic evolution"”from a discrete asset, sold in units known as songs or albums, into a bitstream that increasingly must be monetized in other ways. Sites like iMeem, LastFM and Pandora give away music to make money on advertising. Live Nation is paying huge dollars to sign artists like Madonna, so it can make money through concerts, merchandise and such, rather than relying on platinum records.

Sure, Apple has sold four billion tracks on iTunes"”an amazing achievement by any measure. But it hasn't really changed the way the world buys music. For the most part, it's given a few million people a way to buy a couple of CDs worth of music per iPod. "At this point, it's really hard to imagine a scenario in which the discrete sale of music will come back in any meaningful way," says eMarketer analyst Paul Verna. "It's largely stalled. iTunes is growing, but not in the kinds of numbers that the music industry needs to stay afloat."

Assuming the current talks don't bear fruit, who needs to act‾ Well, it isn't Apple. The company is going to do just fine, regardless of how many iPods or music it sells. The Mac and iPhone are driving the company's growth. American Technnology analyst Shaw Wu goes so far as to call the iPod Apple's "cash cow" business.

Rather, the onus is on the labels to meet Apple more than halfway on price They're the ones with the failing business models. "The labels' backs are up against the wall. Their entire livelihood is being threatened, so they have to do something," says eMarketer's Verna.

The biggest issue is price, which comes down to how much more is the consumer willing to spend. Let's set aside the subscription, and focus on what much more most people would pay for an iPod that could access almost any song. Personally, I could be convinced to pay $100 more on a 8-gig nano, which now costs $200. That's a 50% price hike, but such a device would be worth ten times as much to me. According to the FT, Apple wants the incremental cost to be just $20. That seems way too low. Who wouldn't be willing to pay the price of a CD or two as an entrance fee to the entire universe of musical possibilities‾ So let's split the difference. I think $50 would still be a no-brainer for most consumers"”and might make it worth the labels' time if the device sold in droves.

So here's my hunch. For all his protestations, I think Jobs will ultimately do a deal like this. It could just be that Apple hasn't yet created the user experience to set such a device apart from the likes of Napster, Nokia and Rhapsody. I hope so.

Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.

Suggested Articles

Wireless operators can provide 5G services with spectrum bands both above and below 6 GHz—but that doesn't mean that all countries will let them.

Here are the stories we’re tracking today.

The 5G Mobile Network Architecture research project will implement two 5G use cases in real-world test beds.