$20: the price is right

At first glance, I didn’t think it was very likely that Apple was about to offer some form of unlimited iTunes music, but the more I think about it, the more I think it’s inevitable. From Apple’s perspective, such a move would do two things: it would rejuvenate a saturated iPod market at the perfect time, and it would seal the deal on the absolute dominance of iTunes, now and forever, in such a way as to completely discourage even the spark of an idea of competition from a new entity. And what’s in it for the labels? Only what the labels desire most...obscene amounts of money. More on that later.

There are two potential models being postulated: a monthly all-you-can-eat subscription for iTunes music; and a “free” music plan where the cost of the one- to two-year subscription would be baked into the retail price of an iPod or iPhone.

Apple could probably implement the monthly subscription plan into iTunes pretty easily, and offer it alongside the current “a la carte” model. In other words, iTunes users would have the option of either subscribing to an unlimited music plan or continue to purchase their songs and albums, or both. Conventional wisdom says that the vast majority of people aren’t interested in renting their music in this fashion—that they want to own their music—so it would be very interesting to see whether that is a legitimate consumer position, or if it’s just the end result of the fact that, to date, subscription plans have not been compatible with the market-leading iPod. I suspect the latter would prove to be true.

Though I’ve never been attracted to any of the subscription music services that are currently out there, I feel quite sure that such a subscription plan offered by Apple would instantly validate the subscription model, and be a smashing success. In other words, it’s quite probable that the only reason that all-you-can-eat music plans have failed to date is that Apple hasn't offered one. Apple’s custodianship of the fortunes of music in the 21st Century is that complete.

Which brings us to the second unlimited music model that Apple might choose to implement, the device-centric “free music” plan. Under this scenario, you would pay a bit more for your next iPod or iPhone, and that device would come with unlimited access to the entire iTunes music library for the life of the device, or—perhaps more realistically—a one or two year period.

The music labels love this idea because they have been dying to get their hands on a share of iPod sales, but threatening and cajoling hasn’t gotten them anywhere. By offering iPod users unlimited access to their entire music libraries, the labels would finally have a vehicle for sharing that coveted iPod revenue.

Rumor has it that Apple is agreeable to this model, but the two sides are far apart from each other when it comes to the money. Apple is offering $20 for each iPod or iPhone sold with the unlimited music plan, but the labels are asking for $80. The general tone of the punditry suggests that Apple needs to either cave in and give the labels what they want, or at least meet them halfway. But I think that’s a mistake. The labels should thank their lucky stars and jump on Apple’s offer of $20 per iPod and here’s why.

Let’s say that Apple agrees to pay the labels $80 or even $100 dollars per iPod. The punditry says that this is only fair because, after all, who on earth wouldn't happily pay an extra $100 for an iPod with unlimited music? Answer: a hell of a lot of people wouldn’t be willing to do that. There are a significant number of people who would look at two identical iPods on a shelf, where the only visible difference between them is a sticker that says “free music” and a price tag that’s heavier by a hundred bucks, and would walk out of Best Buy with the cheaper iPod and $100 still in their pocket. “Free music rental is cool,” they’ll say to themselves, “but I don’t buy that many songs anyway, and a hundred bucks is a hundred bucks. No thanks.”

Apple would have no choice but to offer two versions of each iPod model and color—which would run contrary to the simplicity and elegance hard-coded into Apple DNA—and who really knows how successful those $100 “free” music plans would be?

On the other hand, if the music labels accepted Apple’s offer of $20 per iPod—which seems very low at first glance—then Apple would not have to offer different versions of each iPod model. Apple could bake that extra $20 into each unit in various ways (small increase in price, temporarily lower margins, etc.) and could simply offer the unlimited music plan with all iPods and iPhones, whether you wanted it or not. No sales pitch, no special packaging. iPods now come with unlimited access to the entire iTunes music library, period. Thank you, and you’re welcome.

Why should the labels be happy with only $20 instead of $80? Because at the $80 price, it’s impossible to know how many people would opt for the plan. Would one in four people pay the extra money for their next iPod? Maybe, maybe not. By accepting Apple’s $20 offer, on the other hand, the labels would get a smaller cut, but they would get that cut on every single iPod and iPhone sold, and Apple will sell 60 million iPods and iPhones in 2008 alone. That means that each year, Apple would write a check to the record labels for at least $1.2 Billion.

One point two billion dollars.

From one partner.

That’s a lot of cheddar.