Stars Are Aligning for Subscription Music

The Facebook Generation wants instant access to its tunes. A big iTunes library may be optional

For years, Steve Jobs has insisted that people want to own their music. And thanks in part to the iPod's near-monopoly, selling songs for 99 cents a pop has become the prevailing business model. Meanwhile, subscription services—renting access to millions of songs for a monthly fee—have gone almost nowhere.

Now, changing consumer behavior is giving subscription advocates new hope. Members of the Facebook Generation are bombarded with music recommendations every day, and don't necessarily want to pay a buck to check each one out. And since people are used to getting e-mail, appointments, and news feeds streamed to smartphones and other devices, many industry watchers assume they'll want the same for music. "If I can access whatever I want whenever I want," says Ted Cohen, who led EMI's digital music efforts and now runs an entertainment consultancy called TAG Strategic, "why do I need to own it?"

Apple's (AAPL) music store has been so successful that it's easy to overlook how little it has changed amid a shifting marketplace. Four years after its launch, the iTunes Music Store remains an old-school e-tailer. Yes, it offers "listeners also bought" recommendations and "iMixes" from other customers. But even if visitors find a new artist on iTunes, they get only a 30-second sample before buying. So while Apple excels at selling mainstream music, it's not so good at introducing people to fresh sounds.


That's what many music fans seem to want. Millions of millennials are logging onto social networks like imeem and iLike, which allow visitors to discover new music and recommend it to their friends. Millions more are flocking to online radio stations such as Pandora Radio, where you can create your own personalized stations.

Advocates say the subscription approach offers total on-demand access that's worth paying for. Since joining Rhapsody, the longtime subscription leader, Memphis music fan Jim Harris says he "explores a far wider range of material. It's the ultimate way to listen to music." Of course, Harris remains part of a tiny, if vocal, minority. The half-dozen subscription services have signed up fewer than 3 million people in the U.S. so far. Many people are put off by the $10- to $15-a-month fee. The software is glitchy next to Apple's iTunes. Plus the services don't work with the iPod.

But moves are afoot to make them more appealing. The labels, keen to loosen Jobs' grip on digital music, are discussing ways to drastically reduce the annual licensing fee below $120 per subscriber. Microsoft's new version of its Zune offers a service for $14.95 a month that gives access to 3 million songs in its online Zune Marketplace. And Universal Music is backing a concept called Total Music that would bake the cost of the subscription into the price of various devices or cellular service packages.

The subscription guys also are teaming up with other players. In August, RealNetworks (RNWK) sold 49% of its seven-year-old Rhapsody service to MTV. The music channel will promote Rhapsody on air and spend $250 million on marketing over five years. This month, Rhapsody will launch a widget on Facebook that will let users add favorite tunes to their pages (visitors can listen to 25 songs each month free of charge; after that they must subscribe or are limited to 30-second samples). Early next year, cellular giant Verizon Communications (VZ) will begin offering Rhapsody on many of its phones.

RealNetworks CEO Rob Glaser has been waiting for nearly a decade for subscriptions to take off. "Some of the factors necessary to create the Great Jukebox in the Sky have taken longer than I thought," he acknowledges. "But that doesn't tell me it will never take off." Subscriptions won't become mainstream this year or next. How quickly they do depends largely on Steve Jobs. His protestations aside, it has become conventional wisdom in tech circles that he will roll out an all-you-can-eat service the exact moment it makes sense for him to do so.

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