Apple could split device sales with music labels

Updated: 8:10 a.m. PDT

Is Apple rethinking its music strategy?

As part of a deal to offer devices featuring preprogrammed music, Apple would have to agree to share sales revenue from the devices with the labels, says a source close to the deal. Cutting the labels in on iPod or iPhone revenue would mark a sharp turn in Apple's strategy.

The deal being discussed by the labels and Apple calls for the company to license the music and also "kick in a piece of the device sales," said the source. The Apple device, which hasn't been determined yet, would come preprogrammed with a certain amount of music that after a period of time, perhaps six months or a year, would roll into a subscription type of service plan, the source said.

Apple began informal discussions six months ago with Universal Music Group, the largest of the four major music labels, about offering preloaded music on devices, according to the source, who requested anonymity. Talks began in earnest two months ago, the source said, adding that Apple has opened discussions about the offer with all four of the major labels.

An Apple representative said: "We don't comment on rumors and speculation." Representatives from the four top record labels either did not return calls or declined to comment.

The talks are still in a preliminary stage and nothing has been decided, the source said. The Financial Times was first to report on the negotiations between Apple and the record companies.

The service being discussed is similar to one struck between Universal Music and Nokia last year. In December, Nokia announced its "Comes With Music" service, which allows users to buy a Nokia device preprogrammed with a year of unlimited access to a subscription service featuring Universal's songs.

"Comes With Music" is due to start in 2008.

With the Nokia deal, Universal Music receives a share of device sales, just as it does with Zune, and those sold by Sirius Satellite Radio and XM Satellite Radio.

The days of allowing Apple and other device makers to earn enormous profits off the backs of music artists is over, said the source. For a long time, many in the music industry have chaffed at the success of Apple's iPod. They acknowledge iPods were expertly designed and marketed, but they argued the gadget's real attraction was the loads of music that owners could store on them.

"At this stage in the game, the music industry feels it is entitled to something," said the source.

Apple hasn't discussed specific devices with the labels, according to the source. So one could only wonder whether the company would offer the preprogrammed music on a new high-end device, the next-generation iPhone, or some iPod models.

The FT reported that subscriptions would currently work only for Apple's iPhone devices, because it already has a monthly billing relationship with customers through the mobile phone operators offering the device. The "Comes With Music" model, on the other hand, would work with iPhones and iPods.

Universal Music has been driving the preprogrammed idea for some time in an effort to inject some excitement into subscription services, which have seen only lackluster consumer interest.

The record company is in talks with other carriers in addition to Apple as it attempts to expand its relationship with device makers, said the source. Universal Music is dissatisfied with only licensing music. The plan now is to "partner instead of just being a vendor," said the source. Universal Music has aspirations of becoming more of an all-around entertainment company, the source added.

Cutting a slice to Universal Music is one thing, but what about the other three labels? That could mean some serious money and at the very least cut into Apple's margins.