Apple iTunes Plus Unlocks Rights Restrictions to EMI Downloaded Songs

| June 1, 2007 | Digital Home - U.S. | Competitive Intelligence Report

| Analyst: Bruce McGregor

Current Perspective: Neutral
Vendor Importance: High
Market Impact: High

Event Summary

May 30, 2007 – Apple announced its iTunes Store now sells EMI digital music recordings with the option of a premium download called iTunes Plus in high quality 256 kbps AAC and unrestricted format for $1.29 per song and the option to upgrade previously recorded EMI tracks for 30 cents a song and $3.00 an album. Apple will still provide its entire iTunes music catalog with over five million songs in the same versions of 128 kbps AAC encoding with digital rights management (DRM) protection at the same price of 99 cents per song, in conjunction with the higher quality iTunes Plus versions when available.

Analytical Summary

• Current Perspective: Neutral on Apple launching iTunes Plus because it marks the start of its online iTunes Store distributing music content in an unrestricted DRM-free format, but for now it is limited to EMI owned tracks and is sold at a higher price point of $1.29 per track. Apple is providing its iPod faithful a simple to use application to buy select music tracks in higher sound quality and free of copyright protection software authorizing them to be played on multiple portable devices beyond the iPod.

• Vendor Importance: High to Apple because it fulfills its customers’ request for iTunes to be available in an unrestricted and higher quality (256 kbps AAC encoding) digital format. In Apple’s FY Q2 2007 ending on March 31, it stated it made $1.68 billion in iPod sales and $653 million in iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.

• Market Impact: High on the market as Apple rivals will need to pay close attention to the consequences of the largest online music and portable media player company opening up a portion of its content to be accessible on devices outside of Apple including Microsoft’s Zune player. The company’s success in music is linked to the popularity of its iPod and making its iTunes Store Web site vital by enabling iPods to be efficiently filled with music and video content. Amazon is also forming a similar unrestricted online music service with the EMI digital catalog to launch later this year.

Recommended Competitor Actions

• Amazon should speed up the launch of its planned online music service with tracks sold in DRM-free MP3 format. Amazon has also locked-up EMI music content, but it should try to gain a competitive advantage over Apple by getting similar deals with the other top record labels first. Amazon should also hype its benefit of using MP3 format since it is open to all devices while Apple is using ACC format that is not compatible with as many devices.

• Yahoo! Music Unlimited should emphasize the fact it has more downloads per dollar than iTunes, which charges $0.99 to $1.29 per song, whereas the Yahoo! Music Unlimited subscription-based model allows users to download as many songs as they like and to keep the songs they want for $0.79 a piece. Yahoo!’s Music Unlimited is priced at $5.99 a month for one year, or $8.99 on a month-to-month basis.

Recommended End User / Customer Actions

• Apple iPod users are generally forced to use the iTunes Music Store to search and download new music and paying per song downloaded. Consumers interested in getting an iPod should note that the most popular monthly subscription sites like Napster, Yahoo! Music Unlimited, and Rhapsody, do not work with Apple's popular iPod devices and are priced for around just $6 to $15 a month with unlimited access to millions of songs.

• Online music consumers should be aware of the restrictions and rules associated with their digital music device and service they purchase. Ripping a CD to an MP3 file is unrestricted and can be played on most digital music players including the Apple iPod. Therefore, if an Apple iPod user has a song or album on CD, they don’t need to pay the $1.29 a track to get a DRM-free copy playable on an iPod.

• An alternative to iTunes is Yahoo! Music or Napster services which offer access to their entire catalog of millions of songs for a low monthly fee. Yet music content through these providers is restricted to particular play formats and downloaded content that needs to be synced to a computer once a month or the embedded timing mechanism renders the music useless. Also, the buyer needs to beware that once the monthly subscription is terminated, so is access to all the music downloaded through Yahoo! or Napster.

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