Carriers continue struggles with music models

Apple Inc.’s iTunes dominates the digital music dance floor. But following Apple’s lead may not be a wise move for mobile music services.
An astounding 89% of teens go to iTunes for their legal music downloads, according to a recent report from investment bank Piper Jaffray, and in July the storefront passed the 3 billion-download mark. And the company’s proprietary digital rights management model has bolstered its hardware business, with the iPod revenues accounting for 73% of all portable digital music players in January, according to The NPD Group.
But while Sprint Nextel Corp. and Verizon Wireless have tried to mimic iTunes’ pay-per-song model, they failed to grasp a key component of Apple’s digital music business: for Steve Jobs, at least, the money is in the hardware. Analysts estimate Apple makes 40% margins on iPod sales, while music sales deliver razor-thin margins.
So recurring revenue-in the form of subscriptions-may be the key for mobile music services.
Subscription-based music services have been a hard sell for online vendors. Such offerings require subscribers essentially to synch their libraries monthly (limiting users’ ability to copy tunes to other devices or PCs), and are dependent on the DRM “solutions” that consumers abhor.
And online music subscription services are still struggling to gain traction. Napster Inc., Yahoo Inc. and RealNetworks Inc. each continue to work to establish footholds in the space, but seem to have had difficulty convincing music lovers to rent, not buy, their digital music libraries.
But subscription-based mobile music services have popped up around the world in the last year or so. AT&T Mobility in July became the first U.S. carrier to employ the model, teaming with several online music providers to push a service that encourages users to side-load tunes form their personal libraries. Subscription services may get another boost with RealNetworks’ overhauled Rhapsody service: while Real and its partners Verizon Wireless and MTV have remained mum on details of the service, it’s likely to employ a monthly fee similar to Rhapsody’s current model.
Meanwhile, providers of other types of next-generation will be watching to see what models resonate with consumers, according to a report released earlier this year from iSuppli Corp.
“Overall, full-track downloads will lead the wave of converged content delivery to mobile phones,” according to iSuppli. “Beyond just revenue growth, mobile music exemplifies many of the trends and challenges that will soon face the video industry and other premium content markets.”