Apple Contemplating Unlimited iTunes for a Premium

Apple Inc. is reported to be in talks with major record labels to offer free access to its iTunes music library to customers who pay extra for an iPod or iPhone according to a report published in The Financial Times on Wednesday.

The music industry has been abuzz with rumors for the past couple of years that Apple might open iTunes for free downloading. FT has mentioned unnamed music industry sources in reporting that Apple is negotiating with major record labels over sharing of revenue if it starts offering a monthly music subscription for the iPhone and an unlimited music bundle for both the iPod and iPhone.

This new strategy makes a lot of business sense as unlike the existing 99¢-a-song iTunes model, subscriptions form a reliable and consistent revenue source. Consumers would probably appreciate the choice of buying songs one track at a time or paying a monthly fee for an unlimited number of songs.

On the other hand, Apple has every reason not to change its policy. iTunes is already wildly successful. It is the number-two music retailer in the U.S. behind Wal-Mart Stores Inc. as measured by unit volume.

Also what has to be given due consideration is the fact that iTunes sells only digital downloads, and Wal-Mart sells CDs. So iTunes is already the number one destination for online music purchasing.

The iTunes Store boasts of more than 50 million customers and has a catalog of more than 6 million songs having sold more than 4 billion songs. More importantly for Apple, the online music store has been a critical tool for boosting sales of the highly profitable iPod and iPhone.

So iTunes would be a success even if it is operated at a loss, which it doesn't. The iTunes Store contributes only about 10% to Apple's overall revenues- about $2.5 billion in 2007 but it serves as a catalyst for driving the more-lucrative iPod sales and helping musicians get paid for their work.

But the flip side is that growth in sales of the iPod is slowing. In spite of selling a record 22.1 million units in the quarter ended Dec. 29, the growth in sales was 5%, compared to 50% a year earlier.

A new iTunes business model might appeal to a new batch of customers and improve sales. The rumored deal could be a move to encourage consumers to continue purchasing iPods, now that some of the music sold on iTunes can be played on any MP3 player, not just the iPod.

Some of Apple's rivals are already trying out new approaches.

Nokia Corp., the world's largest mobile phone maker, had announced a deal with Universal Music Group in December giving buyers of certain Nokia phones unlimited free downloads of songs from the Universal catalog.

Social networking giants, like Facebook and News Corp.'s MySpace also have their own music-store plans in the works that would allow users to stream music for free, and pay to download MP3 music.

RealNetworks Inc. and Microsoft both offer music subscriptions that cost $14.99 per month.

Now what approach is taken by Apple is something to watch out for because as of now there have been no confirmations from Apple or any music labels that would confirm these rumors.