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Apple iPods come with music?

Apple_ipods_2007 It's poor form to criticize a competitor's scoop, but I won't let that stop me. The Financial Times ran an attention-grabbing piece today about a "radical new business model" Apple was floating with the record labels: letting buyers of premium-priced iPods and iPhones download an unlimited amount of music from the iTunes store. Radical for Apple, perhaps, but not for the music industry, which (as the story points out) is already talking to Nokia about the very same approach.

The labels' thinking about music has evolved so much during the past few years, they're all comfortable now with the concept of seemingly free music. What made the Nokia deal appealing (at least to Universal Music Group; the other major labels are still in talks with Nokia) is the sense that it translated into a reasonable amount of recurring income. Nokia is reportedly paying a sum that amounts to about $5 a month per customer over the 18-month life of the average cell phone.

Nokia_n95_music_store_3 As it turns out, Apple has been floating its proposal for a year or more. The hangup, not surprisingly, has been how little Apple has been willing to pay. One label executive said that the gap between Apple's offer and his company's counteroffer is so wide, Apple has given the proposal little emphasis in recent license negotiations with the company. The FT reported that Apple's offer was about $20 per device; assuming an iPod has a lifespan of two years, that's less money than the labels would collect from two paid iTunes downloads a month. But from Apple's perspective, two paid downloads a month is about right. Last September, Steve Jobs reported that more than 110 million iPods had been sold. Then, as now, the iTunes store was selling about 140 million songs per month. Assuming half of those devices are still in use, the average number of tracks sold per device each month is less than three. That's just guesswork, and it includes some highly questionable assumptions (e.g., all iTunes purchases are by iPod owners). Still, it suggests that $20 isn't as outrageously low as it appears on first blush.

Here are two complicating factors. Every all-you-can-eat model licensed by the major labels, including Nokia's, has required the use of DRM to lock tracks to a device or an active subscription. That's the reason they'll accept a significantly smaller amount of money per track. Otherwise, they expect to be paid something closer to the 70 cents per track they collect from iTunes downloads. Apple hasn't recoiled in the past from using its FairPlay DRM to lock content to individual iPods (it's not impossible to get content off the device, you just can't do it with the tools Apple provides). But Jobs' anti-DRM manifesto last year puts him in an uncomfortable posture on that front -- it's hard for him to tell the public that DRM is a bad thing, then introduce a service that's DRM-based.

Second, the best model economically for Apple would be to build the price of music into every iPod and iPhone it sells. But doing so would raise real antitrust problems, eMusic CEO David Pakman said in an interview today, because it leverage Apple's dominance in MP3 players to improve its fortunes in music retailing. The risk for Pakman and other iTunes competitors is that Apple persuades the labels to let it offer a DRM-free all-you-can-download version of the iPod and the iPhone for a nominal premium -- say, $40. Such an offer might be compelling enough to overwhelm other online outlets, particularly those selling MP3s (as eMusic and Amazon do) that are compatible with iPods. It would also spell doom for subscription music services such as Rhapsody. But again, given what the major labels expect to collect from MP3 downloads, it's hard to imagine them agreeing to a deal like the one the FT suggested unless DRM were involved, which would make the offer significantly less compelling.

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Times editorial writer Jon Healey pens opinion pieces about a variety of business issues, and blogs about technologies that are changing the entertainment industry's business model.

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