RealTime IT News

Music Labels Set to Bite the Apple

Apple Computer is close to inking a deal with the major record labels for a fee-based music subscription services for users of its Mac OS, a somewhat surprising move from a company that has heavily hyped the operating system's "rip, mix, burn" capabilities.

Apple officials refused to comment on rumbles throughout the industry that its entry into the business would come within weeks but analysts with knowledge of the plans say the service will run on the Advanced Audio Coding (AAC) technology, which is a key feature within the MPEG-4 standard.

By adopting AAC as the core of its distribution platform, Apple is giving a huge thumbs up to efforts to make MPEG-4 the de-facto standard for media playback. AAC is styled as the new audio codec of choice for Internet, wireless, and digital broadcast arenas. It provides audio encoding that compresses than the MP3 format.

For Apple, the timing could not have been better. The music and video subscription space has been generating heavy buzz in recent weeks and analysts say the company is well-positioned to take advantage of its rabid fan base.

"Apple is an a unique position. They have a rabid fan base of Mac users who will purchase it just because it has the Apple brand," said Ryan Jones, a digital media analyst with the Yankee Group.

"We are entering a phase when the business rules, as dictated by the major record labels, are changing for the better. The timing is right and it makes sense for a lot of the players, from the ISPs to the PC manufacturers, to hop aboard. The record industry is becoming desperate and they are conceding on the licensing terms," Jones told internetnews.com.

Steve Vonder Haar, who runs the Interactive Media Strategies consulting firm, believes Apple is "one of the most logical players" for offering a music subscription service. "When you consider the capabilities of QuickTime, along with their initiatives with the iPod device, Apple is one of the few companies out there that can tell an end-to-end story for music distribution," Vonder Haar said.He cautioned that Apple must expand the service beyond the base of iPod users to generate critical mass. The Yankee Group's Jones suggested the company could use the music service as a marketing tool for the iPod device. "You have to think of Apple as the whole business. I can see the music service being a loss leader for them. They might not make any money on the (music) service but it can be a huge marketing tool to attract iPod buyers. I can certainly see them going down that road," Jones said.

Then there is the issue of Digital Rights Management (DRM), the data encryption technology used to protect intellectual property on the Internet. Apple has made a name for itself with the "rip, mix, burn" marketing campaign that lets Mac users copy and record songs to CDs but there is no way the labels would ink a deal with a company that shuns DRM.

In fact, Microsoft-backed Pressplay has negotiated in the past with Apple for a Mac-based version, complete with DRM technology but Apple scoffed at using the technology. "It will be interesting to see what types of DRM technologies Apple has to put into place to satisfy the needs of the record labels. If it doesn't have DRM, that would be a huge departure for the labels," Vonder Haar said.

Jones said Apple has been able to avoid DRM in the past because it was basically a hardware and systems company that shied away from services. "You can be DRM-free when you have hardware and systems. When you start offering services, you have to adopt DRM. This is going to be a big challenge for Apple," he added.

In the grand scheme of things, the Apple service will only take up a small chunk of the market for paid downloads (the Mac OS market penetration is still less than 5 percent) and, even then, it won't enjoy exclusivity. RealNetworks has a Mac version of its RealPlayer software selling access to digital music for Apple users.

Not much is known about Apple's pricing plan but Vonder Haar expects the company to set up a two-tiered structure that favors iPod users. "They can make it cheaper for iPod users and make that a part of the marketing plan," he said.

The rival music services -- Pressplay, MusicNet, Listen.com's Rhapsody and FullAudio's MusicNow -- all charge an average of 99 cents per song download and many expect Apple to stay within that range. "The labels are the ones that set the pricing so I don't expect a major difference in what Apple can offer," Jones said.

Even at 99 cents per download, the music services are taking a beating (the labels routinely collect 50 cents on the 99 cents download) and Jones said further price-based concessions would have to be made by the labels.

"They're making concessions but there still is a long way to go. They appear settled on that price and maybe it's an accessible price point at this time. But, will that price jumpstart the industry? No, I don't think so," he declared.

Apple's plan is to launch the service within the iTunes and iLife software packages.