Apple Sees Ringtones As Mobile Music Payoff

That's just one of the questions that hangs in the balance in the midst of high stakes negotiations that are currently going on between Jobs and the major music moguls, according to The New York Times. The Times says the talks have been going on for the last several weeks.

Industry watchers are anxious to see if Jobs, who brought music downloading to millions with the 99-cent-per-song model, will change the rules of the music download game again as he attempts to hammer out a deal with the music labels for Apple to sell ring and ringback music for the Apple iPhone. Currently, iPhone users can only buy iTunes songs on an iPhone if they are connected to the internet via a WiFi network.

Tyler Dikman, president and CEO of Cooltronics, a Tampa, Fla. solution provider who puts together solutions for audio-philes, said he thinks it is likely the two sides will first agree on a subscription pricing model.

"I think the first announcement they make will be a subscription pricing model rather than a variable pricing model," he said. "That's a smart first move for Apple. That flat fee is an important part of the simplicity that Apple provides."

A subscription pricing model would likely push music buyers to move to higher storage capacity iPods which would benefit Apple, said Dikman. "That incentizes music buyers to try new music and listen to new music since there would be no additional cost per month," he said. "If you are paying $10 per month on a subscription basis you are going to want to download as much music as possible."

A subscription model would also likely stop some of the illegal downloading of music that currently goes on since the subscription model is more economically attractive to consumers, said Dikman. "Nobody wins when there is low quality illegal downloading," he said.

One reason Apple would like to move to a subscription model is that iPod sales growth is not as robust as they once were, said Dikman. "What Apple is trying to do is find alternative ways to generate a profit," he said. "iTunes was created to sell iPods and not really to make a profit on music downloads. As sales of iPods slow or decline, Apple needs to find another source of revenue for their most popular device." Apple also would like to see more predictability in their iTunes margins, said Dikman. "For super hot downloads, Apple is probably making close to zero," he said.

As for the music labels, they are likely pushing for a variable pricing model based on the popularity of a song or artist, said Dikman. In that kind of supply and demand model, the big question becomes who determines the supply and demand pricing, said Dikman. "Who is going to set the price of the songs?" he asked.

As for the iPhone ring tone model, Apple is likely trying to turn the tables on the cellular providers who have made the lion's share of the profits on ringtone downloads, said Dikman. "Verizon and AT&T end up taking the majority of the profits in the ring tone market because they in effect sell the download real estate on the cell phone home page," he said. "If you want the real estate you have to give the majority of the profit to them."