How Apple will crush its competition with iTunes Online

Rhapsody. Napster. MOG. Rdio.

What do these four music subscription services have in common? Each company survives on monthly subscription revenues. Each one has an iPhone/iPad app that is prominently featured on its home page. Each one offers a free trial that they hope you’ll love and that you’ll convert to a paid subscription when the trial runs out.

And under Apple’s new subscription rules, each one will soon be forced to start paying 30% of its revenue for each of those easy, one-click subscriptions it gets through an app on an Apple device.

In short, each of those four services has just been torpedoed by Apple. Each one is taking on water. The question now is deciding in what order they go under.

Where do people listen to music? On the go. Even if you initially sign up for a free trial on the web, you’re likely to use the subscription on your phone. As a Rhapsody spokesperson told me last December, “Mobile is everything, and people are increasingly using their mobile devices like Swiss army knives—buying an expensive new (closed) device limits the addressable market.  In fact, it was being tied to certain devices that posed challenges to Rhapsody in the past."

This is a completely new challenge. Yes, Apple says it won't take a cut if you place your order elsewhere. But they've made it inevitable that most of those subscriptions will come from the app.

If you decide to convert a trial to a paid subscription, where are you going to do the transaction? Will you use the easy one-click button on your iPhone? Or will you open your web browser, navigate to the sign-up page, and pay the exact same price after you enter a page full of details including your credit card number, CVV code, and billing information, and then go back to your iPhone to complete the process?

Don’t be silly.

Update: Some commenters seem unwilling to go read Apple's terms, so let me excerpt the relevant portion here:

[I]f a publisher chooses to sell a digital subscription separately outside of the app, that same subscription offer must be made available, at the same price or less, to customers who wish to subscribe from within the app. In addition, publishers may no longer provide links in their apps (to a web site, for example) which allow the customer to purchase content or subscriptions outside of the app. [emphasis added]

Profit margins in the music business are awful. Even if one of these companies can figure out a way to make a decent profit after paying its 30% Apple tax, they'll never survive the second direct hit they will take when Apple brings out its own service, integrated with iTunes.

You know it’s coming. When I read about Apple’s announcement of its new subscription terms this week, the first thing I thought of was Lala, the innovative music service that Apple bought and then buried.

It’s been more than a year since Apple announced it was buying Lala, which was on the verge of releasing an iPhone app. That app never reached the public. On April 30, 2010, Lala announced that it was shutting down. One month later, the pioneering cloud-based music service was officially off the air.

As I speculated last December, “Maybe Steve Jobs has decided that unfettered access to music isn’t a product but rather a feature of something larger—like a premium iTunes subscription that includes season passes to some popular programs currently only available on cable or as a la carte purchases.”

On the next page, I'll share my speculation of how Apple will combine those new subscription rules with its own cherry-picked set of Lala-inspired features.

Page 2: What I expect in iTunes Online -->