updated 07:35 pm EDT, Thu April 12, 2007
The music labels will ask Apple to add a subscription model to its industry-leading iTunes Store as part of their negotiations to renew their music licensing agreements with the Cupertino-based company. According to the Financial Times, the discussions will begin next week when Universal Music, the largest of the "Big Four" music labels, begins its licensing negotiations with Apple. The other major labels, Sony-BMG, Warner Music and EMI, have either already begun talks with Apple or will in the near future, according to the report. The negotiations come on the heels of a revolutionary DRM-free music agreement by EMI and while Apple is in a unique and powerful position in the industry: iTunes, which accounts for 75 percent of the digital music, has sold over 2.5 billion songs.
The licensing talks come amid falling CD sales and a faltering music market. According to one analyst, overall music sales are expected to shrink by 16 percent by 2009.
Variable pricing, subscriptions could boost profits
The report indicates that music label execs believe a subscription service could provide a boost for slumping sales and bring more money to their pockets -- compared with Apple's current pay-per-song model that charges a flat fee of $0.99 per song. Subscription services, they argue, will boost music consumption and would entitle them to a share of the monthly profits.
Variable song pricing, another model that would allow them to increase prices songs of popular songs to boost profits, is also expected to be part of negotiations. The two models, which Apple argues, will push consumers back to piracy, just as the digital music consumption is beginning to take off -- underscoring the growing tensions between traditional media companies and digital companies that have been profiting most from the digital music revolution.
Apple, which has sold over 100 million iPods, has continued to earn profits on the its music player, while sharing its more modest profits from the iTunes Store with music labels. Apple could sell as many as 500 million iPods, according to another analyst report earlier this week.
"The record industry, in particular, has long been frustrated that Apple has reaped most of the profits of the burgeoning online music market through sales of its iPod player," the Financial Times writes. "By contrast, they have earned only modest royalties from digital music sales because most of the songs on iPods and other devices result from illegal download."
While Apple's unique position in the music industry gives it some leverage with the music labels, the "Big Four" are reportedly hoping for an iPod killer.
"They're desperate for an iPod killer so that they won't be beholden to Steve Jobs," said one music executive familiar with the discussions.
Rumors of an iTunes subscription model surfaced again earlier this week when one report indicated that Apple was reconsidering its attitude towards iTunes subscriptions. An executive of Research group INTENT MediaWorks said that discussions with Apple staffers had led him to believe that the iTunes Store will see a subscription service within six months despite Apple's previous insistence on a-la-carte downloads.