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Apple: A Little Curious About Rent-a-Tunes

By Heather Green and Peter Burrows Editor's Note: Apple Computer CEO Steve Jobs hasn't felt compelled to push to online music subscription services, but the company has at least given subscriptions a closer look. The story has been changed to reflect this.One reason for Apple's (AAPL) runaway success in digital music is simple: It was first to figure out a formula for selling songs over the Internet that resonated with consumers. For starters, it developed the super-cool, and now iconic, iPod digital music player. Then, it created the iTunes Music Store, where consumers have purchased more than 500 million tracks at 99 cents a pop.

But there's one form of digital distribution that Chief Executive Steve Jobs hasn't felt compelled to pursue -- online music-subscription services that let users essentially rent rather than own their tunes for a flat monthly fee. Jobs has frequently argued that people want to own, not rent their music.

QUESTIONS APLENTY. Jobs's opinion may not have changed, but Apple has at least given subscriptions a closer look. Two music executives tell BusinessWeek Online that Apple began asking questions about the subscription model earlier this summer, soon after Internet giant Yahoo (YHOO) unveiled a subscription service called Music Unlimited in early May.

While Apple told those music-industry execs that it had no concrete plans at the time, it expressed interest in the strategy of potential new entrants, such as e-tailer (AMZN) and search powerhouse Google (GOOG). According to the sources, it was the first time Apple staffers asked so many questions about the subscription model.

That doesn't mean Apple is considering a move into this segment of the market. Indeed, says one of the sources, Apple would likely consider such a move only if one of its rivals began to make serious inroads into its market dominance. For now, Apple is more focused on making the most of its current model. For example, it recently launched the iTunes store in Japan.

NEXT BIG THING? Apple is under very little pressure to get into the subscription game at the moment. So far, only 2 million or so users have signed up for offerings such as RealNetworks' (RNWK) Rhapsody service or one from Napster (NAPS). Even Yahoo's 3-month-old offering, although priced at less than half of the others at just $60 a year, has failed to make big headway so far (see BW Online, 6/28/05, "Dancing to the Digital Beat").

What's more, say many analysts, Apple has the luxury of time. Until another portable music player arrives on the market and gives the iPod a run for its money, it's unlikely one of the music-subscription services will take off in a big way. After all, most people who want digital music want to be able to hear it on a portable player. But the iPod, which is designed to work only with iTunes, won't operate with the subscription services.

Still, many industry analysts believe subscriptions will ultimately be a big deal. Jupiter Research predicts they'll garner higher revenues than iTunes-like download stores within a few years. Customers pay a monthly fee for unlimited access to around 1 million songs that they can play on their PCs, home networks, and MP3 players.

MOVING HARDWARE. While consumers don't actually own the music they hear, they can play any song as often as they like -- so long as they keep paying the bill. Analysts say that's not only a good deal for consumers but also could provide both music labels and digital-music outfits, such as Apple, a nice and steady stream of recurring revenue via those monthly payments.

Sounds like a win-win for the companies and the customers. But Apple's strategic goal is not to sell music. It's to sell iPods.

Selling songs is marginally profitable and helps Apple keep the support of the music labels. But the iPod is the reason for Apple's runaway success in recent years. Sales of the device soared 343% in the quarter that ended July 31, when the iPods brought in nearly a third of Apple's $3.5 billion in sales.

APPLE'S MOVE. There's no shortage of rivals intent on figuring out ways to crash Apple's music party. Amazon last week posted a job opening for a digital-music service, though the company hasn't announced one yet. And upstarts such as Mercora, iMesh, and Peer Impact are working on and offering different versions of commercial music-sharing networks.

Still, regardless of how many analysts, entrepreneurs, or current subscription customers think these services are the future of digital music, Apple may hold the key to it ever arriving. With Arik Hesseldahl in New York

Green is BusinessWeek's Internet editor in New York, and

Burrows is Computer editor in BusinessWeek's Silicon Valley bureau

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