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Apple's iCloud Bet: You Get What You Pay For

By Rob Spiegel MacNewsWorld ECT News Network
Jun 3, 2011 12:32 PM PT

Just as Apple broke new ground by making a by-the-book deal with the music industry giants 10 years ago -- when the industry was up against the file-sharing wall -- Apple again is leading the way in creating a model for music in the cloud.

Apple's iCloud Bet: You Get What You Pay For

Apple will pay between US$100 and $150 million in advance payments to the four major music labels to get iCloud going, according to a New York Post report. The digital music powerhouse agreed to pay the labels $25 to $50 million each as an incentive to get on board according to the Post's three separate sources.

This could be an effective power move against Google. The search giant has also been negotiating with music labels and may end up having to pay more, according to the Post's music industry sources. Google launched a cloud music beta last month.

Steve Jobs is expected to unveil Apple's iCloud service on Monday at the company's Worldwide Developers Conference. The cloud service will store music online and make it available on different devices. The service will initially be free for users who bought their music on iTunes, but the company reportedly may implement a $25-a-year charge.

The music labels are set to divide the fee with Apple, according to the Post's sources. Apple will take 30 percent, publishers will take 12 percent, and labels and artists will divide the rest.

Apple reportedly has finalized cloud deals with all of the labels.

Apple did not respond to MacNewsWorld's request for comments by press time.

Building the Apple Empire

The deals with the music labels could be the foundation for a strong cloud-music push. As with the introduction of iTunes, Apple could reap a bountiful harvest if the service is user-friendly, supports multiple devices, and is priced right.

"In this age of connected devices and what Apple calls 'the Post-PC era,' having a cloud service to support users with their content interactions, as they move across devices is an absolute must," Azita Arvani, principal of the Arvani Group, told MacNewsWorld.

"The most compelling type of content to woo customers with is music," she continued. "So, Apple's iCloud enabling over-the-air interactions with content from any [Apple] device without connecting to an intermediate device will be tremendously valuable to the users. Having secured licenses with major music labels will give Apple a sky-high advantage over competition from Amazon, Google, Microsoft, and RIM."

This could just be the tip of the iceberg.

"iCloud could naturally expand to movies," said Arvani. "Mobile device software upgrades can be done from the iCloud. It may expand to support non-Apple devices... ."

Though its success seems almost a given, Apple needs to make sure that its service can accommodate the huge flow of users that will likely show up for the service.

"Paying hefty upfront advances to music labels shows how confident and committed Apple is to its iCloud service, while creating a sizable barrier to entry for competitors," said Arvani. "Implementation and performance of the back-end infrastructure is the key to making sure it can handle the load if and when the service becomes popular."

Thinking Different With the Music Establishment

Apple is not covering new ground with this approach. The company made similar moves 10 years ago when it launched its first music service.

"This is the way that iTunes got started," Carl Howe, director of anywhere consumer research at the Yankee Group, told MacNewsWorld.

"There were a lot of folks who were trying to sell music and share music, and Apple was the only one who went to the labels and said, 'We want to sell music at a decent price and cut you in on the deal,'" Howe noted. "The labels said, 'OK, let's do it.' Now [Apple is] doing the same thing. They're saying 'Let's make sure this is licensed; let's make sure the artists get paid.' And they're going ahead. That puts them way in front of their competition."

By doing something old, Apple may have pulled off something new.

"There's some irony here," Howe remarked. "Apple's motto is 'Think Different,' and they've very carefully lined up the music industry. So they've done a very conventional deal with the music establishment."

That conventional deal just might lift the company head and shoulders above its cloud competition.

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