How Apple will crush its competition with iTunes Online

Under Apple’s new rules, music subscription services will soon be forced to start paying 30% of the revenue they collect for in-app purchases on an Apple device. In short, they've been torpedoed by Apple. And they're about to take a second direct hit. Here's how I expect iTunes Online to sing the competition.
Written by Ed Bott, Senior Contributing Editor

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 -->

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I fully expect to see Apple release iTunes Online this year, maybe even this summer. No, I don’t have any sources in Apple or elsewhere; as usual, Cupertino is being extraordinarily secretive about its plans. This is my best guess as to how Apple's inevitable online service will work:

  • For a monthly subscription fee, you’ll be able to listen to any track or album in the iTunes Online library. This is no different from the way  existing subscription services work.
  • Any track you purchase through iTunes will be available as a download and also in your iTunes Online library. For an upgrade fee, maybe Apple will also allow you to add all your past purchases to your online library.
  • Just as with Lala, non-subscribers will be able to listen to any track or album in full, but only once. If you want to listen to it again you’ll have to pay. Obvious Apple will let you buy the track for 99 cents with one click. I’m doubtful that Apple will revive Lala’s concept of letting you buy streaming rights for a dime, but who knows? I’m almost certain that Apple won’t support a library-matching feature like the one Lala had.
  • You’ll be able to stream tunes from the iTunes Online library to any supported device, including an iPhone or iPad or Apple TV.
  • Just as with those competing services, you can download copies of music from your iTunes Online library for offline listening. Those tracks will be tied to your iTunes account.
  • Your iTunes Online tracks and the contents of your personal music library will both be available, merged, in the iTunes app. So you can listen to a playlist that mixes tracks you sync to your iPhone with those that are online. That is a killer advantage that no other subscription service can offer.
  • Your iTunes Online library will also include TV shows, which you can buy as subscriptions, and movies and books. None of which will be in those music-only subscription services.

It wouldn't surprise me if Mobile Me is folded into the iTunes Online service.

Yes, I know what you’re thinking: These services can fight it out on the Android platform. Right? That depends on whether you trust Google. As I pointed out last December:

Eventually, probably early next year, Apple is going to add cloud-based features to iTunes on its portable devices, and when that happens, third-party apps will have a hard time competing. Meanwhile, what looks like a clear field on the Android platform could turn into a very inhospitable environment if the rumored Google Music service ever takes off.

There are really only three companies that have the ability to compete with Apple at this scale: Microsoft, Amazon, and Google. It seems clear to me that Apple will get there first.

I've contacted spokespersons for all four of the competing services mentioned here and will follow up with any interesting responses.

Updated 16-Feb, 1:00PM PST: A Rhapsody spokesperson responds:

Rhapsody is the leading digital music subscription service in the US.  Music fans can access the service using free apps from any Internet-connected device, be it on an Android, Sonos, Tivo, BlackBerry, iOS, or personal computer. Today, Rhapsody subscriptions are available for purchase exclusively via Rhapsody.com.

Rhapsody offers a content based subscription service that makes millions of tracks available to fans pursuant to longstanding partnerships with thousands of rights holders, all of which then distribute revenues to artists and other creators.

Our philosophy is simple too - an Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable.  The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple's 30 percent monthly fee vs. a typical 2.5 percent credit card fee.

We will continue to allow consumers to sign up at www.rhapsody.com from a smartphone or any other Internet access point, including the Safari browser on the iPhone and iPad.  In the meantime, we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development.

Rhapsody has about as much experience as anyone fighting Apple. The odds are this one is headed for the courts.

Update 2: A spokesperson for Best Buy, which owns Napster, says "Best Buy respectfully declines comment at this time."

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