Disharmony at iTunes

The trend towards free music and artists' concerns about album sales are forcing Apple to rethink the future of iTunes, says Stephen Foley

Five billion and counting fast. That is how many songs have been downloaded since Apple's iTunes music store flung open its digital doors in 2003, putting more than 8 million individual tracks within a click and a dollar of anyone with a computer. It is a phenomenal success. More than two-thirds of all paid-for downloads are bought from iTunes, and the store is now the biggest music retailer in the US, eclipsing Wal-Mart and other retail chains. Meanwhile, the symbiotic relationship with Apple's iPod has brought digital music to even the most technophobic of the masses, and meant that the iPod wiped the floor with competing digital music players.

But will it ever be thus? Certainly, beleaguered record labels are stepping up their campaign to undermine iTunes, and rumours are swirling about a dramatic U-turn from Apple's chief executive, Steve Jobs, over the way the iTunes store operates.

Here's the fundamental question: what is the point of the iTunes store if music is free?

First off, there is hardly a majority of record label bosses who think music should be free. Even if you think that high CD prices reward labels far too generously for their investment in finding and nurturing artists, there is still a case that artists should be paid directly when a consumer takes possession of their music.

But no amount of wailing about "music piracy" has stopped filesharing. Indeed, it has only become more prevalent as broadband penetration has increased.

"The trend is towards free," says Arash Amel, head of broadband media and the market research firm Screen Digest. "There is a view that we are close to a ceiling for the paid-for download market, simply because there are so many ways for consumers to get music for free."

The value of music sales in the US and Western Europe at the start of the decade was well over €20bn a year, almost all from CDs. In 2008, that will be down to €13.1bn, of which digital music accounts for €2.7bn. In short, revenues from paid-for downloads and online subscription services are not coming close to making up for the decline in CD sales. And Screen Digest predicts they never will. The market in 2012 will be €11.6bn, it calculates, with just €4.6bn from digital sales.

"Consumers are showing that they want their music for free, and record labels are finally starting to ask, can we make money from free?" Mr Amel said. He uses the analogy of television programmes, expensive media content that is free to the consumer, paid for via other means, such as advertising. "So the labels are looking across at the people who are making money under the free model, and that is the device manufacturers such as Apple and Nokia."

This is why there has been so much talk in recent weeks about iTunes launching an "all you can eat" subscription service in the US, charging users a $129.99-per-year fee for unlimited access to at least half of that 8 million-track music catalogue.

The rumour is, frankly, highly dubious, posted anonymously to several of those Apple fansites where the faithful gather to swap frenzied speculation about what the god-like genius Steve Jobs might unveil next. But a subscription model for music is being pushed heavily by the record labels, Apple has explored such a service several times in the past, and there is a serious new subscription-based competitor coming on the market which could – only could – threaten sales of Apple's new iPhone.

For Steve Jobs, it would be a dramatic turnaround. "People want to own their music," he said last year. "Never say never, but customers don't seem to be interested in it. The subscription model has failed so far." Certainly, early subscription services such as Rhapsody and Napster have failed to take off. However, many in the tech industry continue to believe that a subscription-based iTunes model is inevitable, and has become more likely thanks to record label acceptance of hybrid business models, which allow consumers to keep some or all of the songs they download at the end of the subscription period.

The last time there were any credible smoke signals from negotiations between record labels and Apple was back in the spring, and it seemed then that both sides were still far apart on price. Back then, it was mooted that an "all you can eat" iTunes Unlimited subscription would be bundled with sales of new devices, with Apple paying $20 per device, to be split according to labels' market share. The labels, though, said no, pointing out that Nokia was paying them an estimated four times that for a similar bundled service.

It is that Nokia service that is shaking things up. The Nokia "Comes With Music" initiative launches before Christmas, selling phones-cum-music players that allow users to download and keep an unlimited amount of music. Universal, the biggest music label, home to U2, 50 Cent and Black Eyed Peas, and Sony BMG are enthusiastically backing the service. A similar service is expected soon from a major telecoms group.

Record label executives characterise the current situation as "experimental". Some of the experiments are defensive. Last week, Warner Music prevented iTunes from selling Estelle's latest album, Shine, thinking it might boost sales of the physical CD, as it appeared to have done by keeping Kid Rock's Rock *Roll Jesus album off iTunes. Apple insists that customers are able to buy all the album tracks individually; the labels make fatter margins if fans buy the full album. If that trend takes off – and The Eagles and AC/DC have been down this road too – it will be a very serious blow to iTunes.

Other experiments are more forward-looking. Three of the four major labels have signed up to support MySpace's new service which will stream music for free on artists' pages on the social networking site, in return for sharing advertising revenues. They also supply music to the iTunes rival Amazon, which is selling downloads free of the digital locks that prevent many iTunes songs from being played on devices other than the iPod.

For the moment, Apple's iTunes store is as dominant as the iPod. For the future... well, that's in flux.