March 02, 2008

Marketing opportunities in the evolving music business.

Last week the Financial Times reported that Apple had talked with Universal about bundling music with iPods. Other publications mentioned various figures which still other publications promptly dismissed. The news was also said to be at least six months old.

Music labels have been pressing for subscriptions and other digital music purchasing alternatives for years. Nokia already has a "Comes With Music" deal for its music-playing phones. It is not inconceivable that Apple, which dominates the digital music market, would follow suit in order to defend its position.

Bundled players can include preloaded music or access to online music services. Consumer access can be set for a limited time, after which they would have to pay a subscription or other fee to keep listening.

This could be good news for marketers.

Pepsi, for example, has backed high-profile promotions for iTunes and Amazon MP3. Marketers could also be in demand to underwrite the cost of iPod-bundled music, according to Paul Verna, senior analyst at eMarketer.

"iPods aren't cheap, and many consumers already have large digital music collections," Mr. Verna said. "Would they be willing to pay upwards of $100 per device, as the Financial Times article suggests? It seems like a steep price point given that hundreds of millions of consumers already own iPods and have already acquired substantial collections through downloading, sideloading, file-sharing, borrowing, etc."

For any hardware-based agreement between Apple and the labels to work, the negotiations would have to be far-reaching.

Apple sold $8.3 billion worth of iPods on unit sales of 51.6 million in its fiscal 2007, ended Sept. 30, 2007. This translates to average revenue of $161 per unit. The global music industry made approximately $2.9 billion in digital sales, according to the International Federation of Phonographic Industries.

Forrester Research estimated that in the third quarter of 2007, 42% of all MP3 players owned by US adult Internet users were Apple iPods.

Applying Forrester's estimate as a market-share calculation, Apple could reasonably argue that any hardware-based iPod royalty should yield 42% of global industry sales, $1.2 billion of the industry's $2.9 billion total for 2007. That would equal roughly 14.5% of Apple’s iPod revenues for its fiscal 2007, or about $23 per iPod unit (assuming average per-unit revenue of $161).

That figure corresponds to the $20 Apple is said to be offering labels, according to The Financial Times. However, if Nokia is paying up to $80 per unit, as the article suggests, that would indicate a huge gap between Apple's price point and the labels' presumed expectations.

"Ultimately, the viability of this type of proposal would depend on price and availability of catalogue," said Mr. Verna. "The publishing licenses would also have to be negotiated, not just the master track licenses. For real impact, they'd also have to get all the majors. Getting three-quarters of the labels onboard wouldn't cut it.

"It's also hard to imagine consumers paying hefty premiums for iPods if they're not loaded with the catalogues of the Beatles, Led Zeppelin, AC/DC and any number of other artists whose digital archives have been notoriously inaccessible."

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