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Apple's Influence Upon Digital Music Business

Whether mobile network operators (MNO) and record labels like it or not, the public perception of the cost for legal downloadable music has been very much defined by Apple's one-size-fits-all pricing of $0.99 per song, according to a Pyramid Research study.

Apple has held steady on this price since iTunes launched in 2003, and despite pressure from the music industry to adopt tiered pricing for premium content and to increase retail pricing, Apple has held firm.

The $0.99 price point was set at a time when the majority of digital music consumers had a very different expectation for the price of digital content -- free. The legal alternative to free music had to be at a price point that was not deemed to be excessively high in the public perception; a sub-dollar price tag was probably as high as Apple could have realistically charged.

There may have been another important motive for such a decision -- $0.99 provides little scope for margins from selling tracks, but this is of little consequence to Apple, since the company's business is primarily focused on the sale of hardware.

The above chart compares iPod music player sales against revenues brought in from iTunes store sales, iPod services and Apple branded and third party iPod accessories. Clearly the emphasis is on the selling of hardware rather than content.

Whereas Apple's focus is on revenue generation from hardware sales, $0.99 presents a significant barrier to entry for newcomers to the market basing a business purely around content driven margins. The implication: attempting to displace Apple as the leader may require disrupting their closed loop business model.

That said, even if the major record labels still wanted to raise prices and thereby create the possibility of higher margins for mobile carriers, negotiating this change is clearly not the forte of the telcos. Given their prior experience in negotiating content distribution deals for IPTV, most analysts would side with Apple winning that debate.

It has previously been reported that U.S. telcos were forced to pay significantly higher per-subscriber rates for distribution rights to pay-TV programming -- when compared to the incumbent cable TV MSOs. Once again, the business model is carefully structured to favor the incumbent, at the expense of new entrants.

But, why isn't this an antitrust issue? Apparently, the Clayton Antitrust Act and Sherman Antitrust Act were designed to protect trade and commerce from unfair business practices in the U.S. marketplace. However, the EU nations seem to have a better grasp on when and how to challenge practices that are intended to restrain trade.

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