Should Apple take a chance with music subscriptions?

The all-you-can-eat music services are getting chewed up and spit out. But rumors persist that Apple wants to get into the biz.

It's hard to figure why anyone would do any prospecting in the stony terrain of digital-music subscriptions.

This week, Best Buy acquired the remade and beleaguered version of Napster for a song. The deal is likely bad news for RealNetwork's Rhapsody, the current engine behind Best Buy's digital music store and one of the pioneers in music subscriptions. (I wrote a sidebar about the troubles RealNetworks' Rhapsody may face if Best Buy walks.)

And don't forget, the Yahoo Unlimited subscription service was shuttered earlier this year.

The all-you-can-eat music services are the ones getting chewed up. So why do rumors persist that Apple is interested in getting into music subscriptions? In March, the Financial Times reported that Apple had talked with the top record labels about the possibility of launching a service that would give iTunes users access to its entire library in exchange for paying a premium for iPods or iPhones.

Last month, an anonymous tipster sent e-mails to several Mac rumor sites claiming that Apple intended to charge $130 for "iTunes Unlimited" starting in October. My music industry sources confirmed that Apple has discussed a subscription service with the music industry but said that Apple has yet to sign any licensing deals.

Still, the question is what motivated Apple to consider subscriptions. And it isn't just Apple. CNET News reported on Thursday that Sony Ericsson, the mobile-phone maker, will launch a music service--that will likely include a subscription offering--as early as next week. The move is obviously designed to compete with Nokia's "Comes with Music" initiative. Nokia has begun selling phones that enable owners to access music from three of the four largest recording companies (EMI has yet to sign on) for 12 months. When that period is over, owners get to keep the music but must pay a fee to continue the service.

Ease the pain
What the Nokia and Sony Ericsson services have in common with Napster, Yahoo, and all the subscription services that have come before is that they are designed to generate a recurring income for the music industry. What Nokia, and presumably Sony Ericsson, will do differently is fold subscription charges into a customer's phone bill, where the music industry hopes consumers will find it less painful to pay.

This is just one of the many digital business models the labels are testing. What the cell phone companies must do now is prove they can overcome the obstacles that tripped up other services. One of the biggest challenges, if not the biggest, is consumers apparently don't like the idea of their music disappearing if they stop paying fees.

"I'm not certain how big the consumer (adoption) is going to be," said Mike McGuire, a digital-music analyst with Gartner. "When people think of subscriptions, they think of their magazines and newspapers. When I stop my New Yorker subscription, (the publisher) doesn't come to my house and take back old issues...even though my wife may want him to."

The industry has fared poorly, but perhaps Apple sees something no one else does. The company has a record of making money where others have failed. Digital-music players hadn't found much more than a niche market until the iPod.

Apple CEO Steve Jobs said during the "Let's Rock" press gathering earlier this month that iTunes has 65 million credit cards in its database. Apple already has these people used to buying music from iTunes. How much more of a sales pitch would be required to get them to pay a monthly fee for access to the iTunes' library?

Chris Castle, a longtime music insider and attorney, says he believes there's a market for subscription-based cell phones.

"There are people out there who have high-end home audio systems that want high fidelity and clean copies of songs," Castle said. "They don't want to rip lots of content. They aren't willing to pay a $1 a pop for it, but they'd be willing to pay something for it. I think preloaded hard drives are a business, provide they offer lots of stuff. The questions are what do the publishers want for it? Can you make a deal?"

Castle sees the potential for artist-driven or genre-driven preloaded devices.

Risks galore
There are still plenty of risks, Castle acknowledged. Here's just a few of them. Any new music service, whether selling downloads or subscriptions, must compete against iTunes, the No. 1 music retailer in the land, which just happens to be tethered to the best-selling digital music player, the iPod. In addition, mainstream consumers still aren't familiar with the music-subscription model. Napster and Rhapsody both spent a lot of money trying to educate consumers on how the music-subscription model works.

While some download stores, such as Amazon.com, have begun selling songs in the MP3 format--which means they will play on the iPod--subscription services still wrap music in digital rights management software. That means those songs won't play on the iPod.

Another big problem is that most of the subscription services that have come before have had to make themselves compatible with the plethora of iPod competitors. That meant every time a device maker upgraded its firmware, Yahoo or Napster had to make sure their service still functioned properly on the device.

Since Rhapsody and many of the other subscription services were forced to work with Windows Media, they often had little say on when upgrades or fixes to the software were made, said a source close to Rhapsody.

And when it comes to consumer adoption, there's not much to prove the cell phone music services will have an easier time acquiring customers. Research firm Strategy Analytics said Thursday a recent survey showed that although 83 percent of respondents listened to music on their phones, only 6 percent of the tracks were obtained from mobile stores.

Who knows, Apple could come in and prove the experts wrong, but at this point a better strategy appears to be to let others keep taking their whacks.

 

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