Reports that Apple is discussing an "all-you-can-eat" subscription music service with major record labels are overblown, say people in a position to know. But giving customers access to the entire iTunes catalog in exchange for a premium on iPod music players isn't a bad idea—and it's one Apple may need to consider.
According to a story in the Financial Times, Apple (AAPL) would charge enough for iPod and iPhone devices to cover the cost of licensing entire music collections. It would use that premium to create a pool of revenue, a portion of which would be divided among the major music labels, the newspaper said.
Trouble is, no such talks are under way, according to people familiar with Apple's plans. An Apple spokesperson declined to comment. Insiders at major music labels were similarly dismissive. One person familiar with the matter said the idea of subscription plan has been "kicked around" for about a year, but said there have been "no meaningful discussions" on the subject.
That doesn't mean the music industry wouldn't welcome the chance to distribute songs and albums through a subscription plan. The reason is simple. Unlike the existing 99¢-a-song iTunes model, subscriptions provide a reliable revenue stream. Customers who pay $10 a month for access to a music library contribute a predictable cash flow. At present an iTunes customer can buy 12 songs one month and no more for months on end. The music industry has long railed against Apple's adherence to an à la carte model and its refusal to consider variable pricing, such as charging a higher price for songs deemed more valuable.
Consumers would probably welcome the chance to choose whether to keep buying songs one track at a time or pay a monthly fee for an unlimited number of songs. "There may be millions of people who would never buy into the iPod-iTunes ecosystem who'd be willing to pay $7 to $10 a month for all the music they can get," says analyst Michael Gartenberg with JupiterResearch. "If anyone can explain the benefits of a plan like this, it's Apple."
So why won't it? For starters, Jobs doesn't have a lot of reason to change tack. The iTunes Store is wildly successful. It has become the second largest music retailer in the U.S. behind Wal-Mart Stores (WMT). It boasts some 50 million customers and has sold some 4 billion songs since its inception in 2003.
More important for Apple, the online music store is a catalyst for sales of the highly profitable iPod and iPhone. So iTunes would be a success even if it operated at a loss, which it doesn't. Apple has sold nearly 142 million iPods since the product family launched in late 2001, most of them since 2005, plus 4 million iPhones. Total them all up and you find that the average iPod or iPhone owner buys fewer than 30 songs and tends to fill the iPod with music from an existing CD collection or other means.
Besides, some subscription services have struggled to gain wide acceptance. Jobs considers subscriptions more akin to rentals, because customers never permanently own the music they listen to. Purchasing a song on iTunes is more like purchasing a CD that enables the buyer to play it at will, the argument runs.
Here's the rub: Growth in sales of the iPod is slowing. Despite having sold a record 22.1 million units in the quarter ended Dec. 29, the year-on-year growth rate was 5%, compared with 50% a year earlier. A new iTunes business model might appeal to a new batch of customers who have passed on the iPod-iTunes combo as currently offered.
New competition gives Apple additional reason to consider alternative sales methods. Social networking giants, including Facebook and News Corp.'s (NWS) MySpace have their own music-store plans in the works. MySpace is said to be working on its own ad-supported service that would let users stream music for free, and pay to download MP3 music files à la carte, similar to a service introduced by Amazon.com (AMZN) late last year.
A strong competitive threat from MySpace, the labels hope, might spur Apple to reconsider its aversion to subscriptions. As an executive with an independent music label familiar with the thinking of counterparts at larger labels puts it: "They are fixated on not getting shafted by Jobs again."