Apple's Deals May Transform Digital Music

Illustration by QuickHoney

By Brad Stone and Andy Fixmer

(Corrects spelling of Russ Crupnick)

Compared with buying e-books, building a digital music collection is a hassle. E-books zip directly to reading devices like the Kindle and Nook and are backed up "in the cloud"—on the servers of Amazon.com (AMZN) and Barnes & Noble (BKS). A digital song, on the other hand, is typically downloaded to a PC and must then be manually transferred to an iPod or mobile phone. If you lose your Kindle, you can always download an e-book again; if the PC crashes or the iPod falls into the bathtub, the song goes down with it.

Moving music to the cloud has been an elusive goal for big tech companies and their music industry counterparts, until now. In the past two months, Amazon and Google (GOOG) have unveiled cloud music services, albeit to mixed reviews and indifference from consumers. These new services let users upload their music collections into so-called digital lockers on the Internet and stream the songs they own to a variety of devices. Both are limited, because neither Google nor Amazon could reach an accommodation with music labels. Label executives say they are negotiating aggressively to make sure they profit from the shift to the cloud. It may be the last opportunity to stem rampant piracy and years of plummeting sales.

Apple (AAPL), the reigning heavyweight of the music business, may have solved this cloud conundrum. It has reached agreements with three of the four major music labels and is close to reaching terms with the fourth, Universal Music, according to people with knowledge of these deals but who can't speak on the record because the talks are private. The company could preview its cloud plans as early as June at Apple's annual Worldwide Developers Conference in San Francisco. The music industry will be watching to see whether Steve Jobs & Co. have discovered a way to quell the deep anxieties of the music biz while creating a flexible, easy-to-use service that isn't too expensive. "With a big enough checkbook, anyone can get a deal with the record labels," says Michael Robertson, founder of an unlicensed cloud music locker called Mp3tunes, which is embroiled in a lawsuit with EMI. "The question is whether Apple's cloud music service will be consumer-friendly." Apple declined to comment.

Apple's music service, which Engadget and other tech blogs are already calling iCloud, might well represent the future of recorded music. Armed with licenses from the music labels and publishers, Apple will be able to scan customers' digital music libraries in iTunes and quickly mirror their collections on its own servers, say three people briefed on the talks. If the sound quality of a particular song on a user's hard drive isn't good enough, Apple will be able to replace it with a higher-quality version. Users of the service will then be able to stream, whenever they want, their songs and albums directly to PCs, iPhones, iPads, and perhaps one day even cars. And the music industry gets a chance at the next best thing after selling shrink-wrapped CDs: monthly subscription fees, a la Netflix (NFLX) and the cable companies. "We will come to a point in the not-so-distant future when we'll look back on the 99? download as anachronistic as cassette tapes or 8-tracks," says Russ Crupnick, a music analyst at NPD Group.

While it may be a huge shift, it won't be free. Apple no doubt has paid dearly for any cloud music licenses, and it's unclear how much of those costs it will eat or pass on to consumers. One possibility would be to bundle an iCloud digital locker into Apple's MobileMe online service, which currently costs $99 a year and synchronizes contacts, e-mail, Web bookmarks, and other user data across multiple devices. Users will be able to store their entire music collections in the cloud—even if they obtained some songs illegally. That would finally give the labels a way to claw out some money on pirated music.

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