Apple Hopes to Cash in With Ringtones, Music Downloads For iPhone

Apple and music label have high hopes that new music offerings will yield big profits.

There's some moving and shaking going on between Apple and the major music labels. Preceding the release of the new 3G iPhone, Apple is looking for new ways to cash in on its growing popularity. And music labels are hoping to get perks of their own, by haggling with Apple to loosen some of its long time policies which have irked the labels.

First, Apple and the labels are in talks for possible over-the-air downloads. Previously, the iPhone could not directly download songs via its cellular broadband network. However, thanks to faster speeds from the 3G networks, it should be possible at last to download songs on the go.

Standing in the way are the music labels who are arguing that Apple needs to pay a higher price for over-the-air downloads, as opposed to standard downloads. The labels current sell standard downloads wholesale for 70 cents, which Apple in turn resells on its iTunes store for 99 cents.

Both Apple and the labels are eager to cut a deal, though. Apple's recent deals have grown the total number of users reached by its carrier networks from 153 million to 575 million. Even if just a scant fraction of these users purchase the iPhone, it will represent an even more significant market to the labels as time goes on.

And Apple has concerns of its own. Many phone manufacturers are moving aggressively to push music compatible phones, many of which come with music packages. If Apple falls behind in its quality of offerings, it will likely pay the price in market share. Having already struggled with poor sales in the European market, Apple is eager to safeguard its back against competitors such as Nokia and Sony Ericsson.

Both Apple and the labels are also eager to expand their offerings for ringtones, a particularly lucrative market. Currently Apple offers a limited selection of ringtones via a 99-cent ringtone upgrade to various tracks on its iTunes store.

Apple also looks to expand its ringback selection. Ringbacks are like ringtones, except they play for the person calling your phone, in place of the standard "ring ring" noise. Ringbacks may command an even higher premium wholesale price than ringtones, raising the possibility of ring backs in the range of $2.49 or more. Some complain about the recording industry's creative pricing tactics for ringtones and ringbacks, but they keep selling relatively well.

The labels say that Apple is very eager to work towards a deal. Says one label executive involved in the talks, "They want a big launch in June."

Labels are taking the chance to use the negotiations as an opportunity to try to push Apple to let them adopt a more flexible price structure, as opposed to the current model, a flat price of 99 cents per song. Some fear this would lead to price gouging, but the major labels insist they would only charge more for new hit tracks, and would charge less than 99 cents for older tracks.

Apple does currently allow the labels to set their own prices for full album downloads. This allows the labels to employ a favored tactic, throwing in art, bonus tracks, and other content, in order to raise the price a few more dollars.

There is some evidence that Apple may consider loosening its price structure. It has allowed HBO to charge $2.99 for its TV episode downloads. All other TV downloads are priced at $1.99.

In a more unlikely side of talks, it is reported that Universal Music Group is pushing Apple to offer subscription music services. Such a plan could allow iPhone users with unlimited music from the labels for a one or two-year subscription period. Sources familiar with the talks say that the labels think the service is worth much more than Apple does, and they're unlikely to reach a compromise. However, if they did it could provide a competitor to the similar Nokia "Comes With Music" service that offers unlimited free downloads to keep. Apple will likely eye the success of this risky program, which has been criticized as unprofitable, before it makes any big moves.