The Changing World of Music on Handheld Devices

Includes: AAPL, NOK
by: Ranjit Mathoda

The Financial Times reports:

Apple (NASDAQ:AAPL) is in discussions with the big music companies about a radical new business model that would give customers free access to its entire iTunes music library in exchange for paying a premium for its iPod and iPhone devices

While the music industry appears to be asking for a $100 premium, Apple is bargaining for a $20 premium (see the Financial Times article).

How much would you pay up front to have unlimited access to music on the portable device you carry around every day?

Most people have their personal devices for about 2 years. A subscription service of $8 a month costs $192 over the life of the device, and is a lot more complex to use. Thus by one measure the music industry’s price seems very attractive to customers.

Yet the average amount of songs sold through iTunes for every iPod is about $20. Any amount over $20 is bringing the music industry revenues it doesn’t have now. And as bands make more and more of their money from live events, it makes sense from an advertising perspective for their music to be distributed broadly, listened to frequently, and consumed with abandon. So while the music industry may hold out for more, at anything over $20 they are gaining revenues, usage and exposure.

Contrast one up front fee to the current system. Buying each song individually on (NASDAQ:AMZN) or in iTunes requires many more purchasing decisions, which reduces the total amount of music listened to legally. Downloading free music from the Internet is fraught with legal risks. Since many listeners to music are children or young adults, with a choice of asking their parents for more iTunes money for song purchases or downloading songs illegally, a device with an unlimited access to music also solves a significant problem for parents.

The future of media. The future of the music industry could be bolstered by such a deal. A steady form of legitimate revenue that its users will actually use, supplemented by ancillary revenues from greater live venue attendance, could make the industry stronger. The future of handheld media devices, particularly devices connected to fast wireless Internet networks, is looking fantastic. They are rapidly becoming the most powerful form of distribution for any form of digital media, from music, to books (see the Kindle), to software (see the iPhone software keynote). What’s next?