How iTunes Subscriptions Could Succeed

Apple should take its digital music business a step further by creating a home audio system, complete with an iTunes subscription option

by Arik Hesseldahl

Apple ought to change its tune on iTunes. Or so say many people who follow the consumer electronics maker. Their point: Apple (AAPL) should give users the option of accessing all or most of the music library for a monthly fee (BusinessWeek.com, 3/20/08), in addition to the existing à la carte model that lets users buy one song or album at a time.

Some of the biggest proponents of this idea are record labels that would like a more regular, predictable revenue stream from North America's second-largest music retailer behind Wal-Mart (WMT). Apple CEO Steve Jobs says he's against the idea, arguing he'd rather have people own, and not just rent, the music they pay for. My take is that as far as Jobs is concerned, the existing model isn't broken, so why fix it? He's selling billions of songs on iTunes. No, it doesn't make a lot of money, but iTunes does generate a lot of interest in the iPod and other Apple products that do.

I'm coming around to the notion that an iTunes subscription model, alongside Apple's existing system, could work quite well, especially if it's sold in conjunction with a network-ready piece of hardware.

Shelf-Top System

Lesser players in the digital music business such as RealNetworks (RNWK), Napster (NAPS), and Microsoft's (MSFT) Zune marketplace have embraced subscriptions. I used Rhapsody for the better part of a year and was for the most part pleased with it. For $12.99 a month, I could play music on my Mac or PC without paying for an album I ended up not liking. I could take music I was curious about for an extended test-drive. If I liked it, I'd go over to iTunes, buy it, and keep it forever.

Rather than trying to compete directly with Apple, Rhapsody has gone a different route, getting itself embedded into standalone audio hardware—notably the Sonos Sound System, TiVo (TIVO) boxes, and some high-end audio gear from Denon. It is in conjunction with audio hardware that I think the subscription model makes a lot of sense.

The idea is that the user buys a piece of equipment with a ready connection to an online music store and then pays a monthly subscription fee for unlimited access to many or all of the songs. Apple wouldn't be the first to try to make this work, but it could possibly do it better. I'm imagining a shelf-top audio system that would contain what you'd expect: an iPod dock, a conventional AM-FM radio, and perhaps HD Radio (BusinessWeek.com, 5/29/07), or the option to add on the satellite radio service of your choice. But it would also connect to a home network, via both Wi-Fi and Ethernet. This would make it the ultimate Internet radio right out of the gate.

Subscription-Ready with Direct iTunes Access

Products like this exist. Denon's S-32 and S-52 come to mind. They're expensive, starting at about $500, and aimed at big-spending audiophiles. But Apple can bring a few things to the table that no one else can. First would be its unmatched sense of aesthetic design. Second, Apple could include a touch-screen interface similar to the one on the iPhone and iPod Touch. When selecting music from your iTunes playlists, you could use your fingers to flip through images of your favorite albums, just as you do on those two handhelds.