Slowing iPod sales could prod Apple to make the move, adds analyst
Apple Inc. is talking with major record labels about offering unlimited access to the iTunes music collection for a flat fee paid when purchasing a new iPod or as a monthly subscription fee, the Financial Times reported today.

The move would be a dramatic change from Apple's current business model, under which the company profits from the sales of its iPod music players but essentially breaks even on the 99 cents per track that customers pay to download music from iTunes.

"Rumors of Apple doing a subscription music service are as old as ... well, as old as the iPod itself," said Michael Gartenberg, an analyst at JupiterResearch, in a post to his blog today. "But a new report [is] that Apple will be doing exactly that. It appears there are two models under discussion, a traditional rental service with a monthly fee and a model tied to the life of a specific device with a single up-front payment, similar to Nokia's "Comes With Music."

According to the Financial Times, the discussions involve both a one-time fee as well as possible subscription models. In the former, Apple could add as much as $100 to the price of its iPod and iPhone devices in exchange for unlimited access to iTunes for the life of the hardware, sources told the newspaper. The company is also talking with record companies about subscription plans that would run $7 to $8 per month.

Several services, including RealNetworks Inc.'s Rhapsody, use the "all-you-can-eat" subscription model, but they charge considerably more each month. For example, Rhapsody's fee is $12.99 per month for unlimited access from a computer or $14.99 per month to load selected music players with any tracks from the service's library.

Ezra Gottheil, an analyst at Technical Business Research Inc., said he was somewhat skeptical that Apple would change its music model but noted that the company has been having trouble pushing iPods. "[Apple CEO Steve] Jobs has been quoted several times as saying, 'People don't want to rent their music; they want to buy it,'" said Gottheil. "But they may be considering this to fill a place in their portfolio for those who do want to rent music."

Such talks, if they are indeed taking place, could have been prompted by the slowdown in iPod sales. "The fourth quarter was essentially flat [in iPod unit sales], which is pretty darn bad, and they've dropped considerably since then," Gottheil said. "We've read it, and others have read it, as a saturation of the high-end music-player business. There's a finite worldwide demand for something that just plays music."

Apple has seen iPod unit sales go up while the average sales price (ASP) went down, he added, noting that the shift in buying patterns favored the less-expensive iPod Shuffle and iPod nano. "Then the shuffle began to erode as attractive alternatives hit the market," said Gottheil. "Apple even lowered the price of the Shuffle to keep it going."

A month ago, Apple slashed iPod Shuffle prices by 38%.

It appears that Apple is positioning the iPod touch, the device that resembles the popular iPhone smart phone, as the future of its player line, Gottheil continued. "This is a new market for them -- a device that goes well beyond playing content," he said.

Apple's top-of-the-line player can download movie rentals, the new iTunes service that Jobs introduced in mid-January. It's also the only iPod that can now download iTunes music via a Wi-Fi connection.

Gartenberg made note of the connection between the existing movie rentals and the talk of unlimited access to iTunes music. "With the latest changes to the Fair Play DRM [digital rights management] to support movie rentals, the technology now would also be able to support a subscription service as well," said Gartenberg.

Apple declined to comment on the reports.