Technology

Apple's Deals May Transform Digital Music


(Corrects spelling of Russ Crupnick)

Compared with buying e-books, building a digital music collection is a hassle. E-books zip directly to reading devices like the Kindle and Nook and are backed up "in the cloud"—on the servers of Amazon.com (AMZN) and Barnes & Noble (BKS). A digital song, on the other hand, is typically downloaded to a PC and must then be manually transferred to an iPod or mobile phone. If you lose your Kindle, you can always download an e-book again; if the PC crashes or the iPod falls into the bathtub, the song goes down with it.

Moving music to the cloud has been an elusive goal for big tech companies and their music industry counterparts, until now. In the past two months, Amazon and Google (GOOG) have unveiled cloud music services, albeit to mixed reviews and indifference from consumers. These new services let users upload their music collections into so-called digital lockers on the Internet and stream the songs they own to a variety of devices. Both are limited, because neither Google nor Amazon could reach an accommodation with music labels. Label executives say they are negotiating aggressively to make sure they profit from the shift to the cloud. It may be the last opportunity to stem rampant piracy and years of plummeting sales.

Apple (AAPL), the reigning heavyweight of the music business, may have solved this cloud conundrum. It has reached agreements with three of the four major music labels and is close to reaching terms with the fourth, Universal Music, according to people with knowledge of these deals but who can't speak on the record because the talks are private. The company could preview its cloud plans as early as June at Apple's annual Worldwide Developers Conference in San Francisco. The music industry will be watching to see whether Steve Jobs & Co. have discovered a way to quell the deep anxieties of the music biz while creating a flexible, easy-to-use service that isn't too expensive. "With a big enough checkbook, anyone can get a deal with the record labels," says Michael Robertson, founder of an unlicensed cloud music locker called Mp3tunes, which is embroiled in a lawsuit with EMI. "The question is whether Apple's cloud music service will be consumer-friendly." Apple declined to comment.

Apple's music service, which Engadget and other tech blogs are already calling iCloud, might well represent the future of recorded music. Armed with licenses from the music labels and publishers, Apple will be able to scan customers' digital music libraries in iTunes and quickly mirror their collections on its own servers, say three people briefed on the talks. If the sound quality of a particular song on a user's hard drive isn't good enough, Apple will be able to replace it with a higher-quality version. Users of the service will then be able to stream, whenever they want, their songs and albums directly to PCs, iPhones, iPads, and perhaps one day even cars. And the music industry gets a chance at the next best thing after selling shrink-wrapped CDs: monthly subscription fees, à la Netflix (NFLX) and the cable companies. "We will come to a point in the not-so-distant future when we'll look back on the 99¢ download as anachronistic as cassette tapes or 8-tracks," says Russ Crupnick, a music analyst at NPD Group.

While it may be a huge shift, it won't be free. Apple no doubt has paid dearly for any cloud music licenses, and it's unclear how much of those costs it will eat or pass on to consumers. One possibility would be to bundle an iCloud digital locker into Apple's MobileMe online service, which currently costs $99 a year and synchronizes contacts, e-mail, Web bookmarks, and other user data across multiple devices. Users will be able to store their entire music collections in the cloud—even if they obtained some songs illegally. That would finally give the labels a way to claw out some money on pirated music.

The service will probably vault Apple ahead of its major rivals in the race to the cloud. In March, Amazon unveiled Cloud Drive, which requires users to upload their entire collections onto the company's servers. That's a time-consuming process for customers and forces Amazon to store multiple copies of the same songs. Amazon announced the effort without engaging in licensing discussions with the labels and giving them only an 11th-hour preview, according to three people familiar with the matter. Labels objected to some elements, such as Amazon selling songs from its MP3 store and automatically storing backup copies of those files on its own servers without paying the labels any extra fees, according to executives at the labels. Amazon spokesperson Sally Fouts would not comment on the company's dealings with labels and says only that music sales have risen since the service launched. (On May 23 the company's servers overloaded when it offered Lady Gaga's new album, Born This Way, for 99¢.)

Google negotiated with the music labels for more than a year to create a cloud music service, then launched an unlicensed service similar to Amazon's when talks foundered. According to two music executives familiar with the discussions, Google was prepared to pay more than $100 million up front to the four major music labels for licenses, but talks broke down over the music industry's concern that search results in Google and YouTube often point to pirated music. Google's unlicensed service, Music Beta, allows users to upload 20,000 songs they already own for free and features an "Instant Mix" feature that can generate a playlist of similar songs based on a single track. But Google, unlike Amazon and Apple, still hasn't arrived at a basic deal with the labels to sell digital music. "We've been in active negotiations with the labels with mixed results," says Zahava Levine, director of content partnerships for Android, Google's mobile platform. "We want to help them sell their artists' music and have a lot to offer given the broad reach of Android and Google generally."

There's irony in the possibility of Apple trumping its rivals yet again in music. For years the labels have complained about Apple's hammerlock on digital music and sought to nurture a strong competitor. Now they "are about to give Apple even more power to dictate how music is consumed," says Daren Tsui, chief executive officer of mobile entertainment company mSpot. Yet Tsui and others believe that ultimately the cloud may deliver a more even playing field. Apple is unlikely to make its music service available for devices that run competing software, like Google's Android. And the labels figure that once Apple gets out the door, Google, Amazon, and others will follow with similar licensed services. Then the elegance of crash-proof, bathwater-resistant, play-it- everywhere music will finally be within reach.

The bottom line: Apple may unveil a cloud-based music service in June. The music labels, which need a new revenue stream, are signing on.

Fixmer is a reporter for Bloomberg News in Los Angeles.
Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.

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