Can Apple iTunes Compete with Free? (AAPL, AMZN, P)

Last week, the long-awaited (by some) US launch of the Spotify streaming music service finally got out of the gate. At the time of the launch, the service was available by invitation only, but the more than 100,000 invitations were quickly gone.

The terms of use are simple: free for a limited number of hours per month with advertising; $5/month for unlimited hours and no ads; $10/month includes streaming and offline playback from your mobile smartphone. For less than the cost of a single CD per month, Spotify gives its users access to more than 15 million tunes. Neither Apple Inc. (NASDAQ: AAPL) nor Amazon.com (NASDAQ: AMZN) can match the price. Recently public Pandora Media, Inc. (NYSE: P) follows a free, advertising-supported radio station model (more or less).

We sorted through some of the differences among Apple, Amazon, and Spotify earlier this year.  And displacing iTunes will not be a gimme.

First of all, iTunes is doing very well, thank you very much. Some projections say the store could generate $13 billion in sales by 2013. That might be a bit aggressive, but it’s not beyond the realm of possibility.

Second, it remains to be seen whether users will be satisfied with “renting” music as opposed to owning it, and how many will pay the rental fee. Determined music lovers can already get their favorite tunes for free by stealing them, and some subset of these thieves will survive even it Spotify’s service were free. Most, though, out to be happy to pay a small monthly fee to gain access to 15 million tunes, legally, on any computer or smartphone, anywhere in the US or Europe.

Both Apple and Amazon have ‘music-storage-in-the-cloud’ features, but users have to own the music before storing it in the cloud. This is a half-way measure that no one will be satisfied with for long.

A paradigm shift of this magnitude is not easy to bring about. Casual music listeners may be satisfied with the iTunes or CD-buying model because they don’t consume a lot of music. But died-in-the-wool music lovers should jump all over Spotify’s offer.

The proof will begin to be revealed when Apple next negotiates its iTunes deal with the major music labels. If it negotiates a deal that mirrors Spotify’s service, then we’ll know for sure the direction the future of recorded music will take. As far as what the share vote is on the outcome, Apple has put in new all-time highs even ahead of earnings.

Paul Ausick