Curious about iTunes LPs? For the price of some dreadful music, you can get one free.

Image: Apple Inc.

It's hard to imagine Steve Jobs choosing the tracks that appear on the "Holiday Sampler" Apple (AAPL) released this week, just in time for Christmas.

Barry Manilow singing "Jingle Bells"? "The Twelve Days of Christmas" done as an instrumental by the Mexicani Marimba Band?

This is the kind of music that makes you want to turn off the radio for the month of December.

If Apple really wanted to get people to check out iTunes LP — a bonus-filled format that hasn't exactly taken the world by storm — they would have done better to give away one of the good ones. For example, The Doors or the Dave Matthews Band albums that Apple demoed for the press last September.

This LP doesn't do the format, or the listener, any favors. Stephen Colbert, who may be the freshest thing on the album, has it right:

Get ready Brother for another Christmas song
They play for a month, Ad infinitum
One day it struck me someone must write 'em
So, it's another Christmas song

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Only if industry players successfully balance content, customer experience and revenue models

By Tom MacIsaac, CEO, ExtendMedia

MacIsaac: "TV Everywhere" is a logistical challenge that media companies need to face. Photo: ExtendMedia

Add this to the list of things the Internet has changed: Your cable or satellite company now wants to let you, as a subscriber, watch the content you’ve paid for on any device you want, any time you want.

The cable crowd has little choice: consumers are accustomed to time shifting their television viewing using DVRs, and now sites like Hulu make it easy to access network television and old shows on the web.

But getting cable and satellite companies to buy into “TV Everywhere” was the easy part. The hard part comes in executing the concept.

The first step is to determine how to authenticate users at multiple sites and ensure they are subscribers before providing access. Although it is often suggested that this is a huge barrier, in reality the technology part can easily be solved using a standards-based approach once a basic approach is agreed upon.
Once basic authentication is resolved the real work can begin. The challenges then are less about technology and more about launching a viable service that people want to use and capturing and distributing the revenue accordingly. First, several unlikely bedfellows –competing service providers and their shared content partners—must agree on a business model that makes sense. This task dwarfs any other technical issues.

Who makes money, and how?

How will these services be monetized? Cable companies have said repeatedly that subscribers won’t pay more for entitled services like TV everywhere. Is this scenario really likely? What does it mean now that Hulu is publicly stating they’ll switch some content to a subscription based model? What if Comcast (CMCSA) becomes a part-owner of GE's (GE) NBC and Hulu as has been rumored?

What is clear is that the successful video services of the future must rely on several different revenue models to build a viable business. For evidence of this, look at three of the most successful video offerings – Hulu (ad-supported), Netflix (rental) and iTunes (purchase). Three of the most popular video services leverage three different business models. If you dig further, you will find that each is contemplating expanding their models to include others.

For example, Apple is rumored to be considering a subscription offering. Going forward, I fully expect this trend to continue. These transactional models will also need to be carefully blended with up-sell/cross-sell capabilities that encourage consumers to try new subscription services while continuing to “snack” on a la carte offerings. Consumers now expect the ability to select specific shows and this behavior must be tied into the more predictable revenue stream of a subscription model.

Content remains king (sorta)

With a multi-revenue model approach nailed down, service providers can then focus on building a compelling content library.

The best services have the widest content catalog—period. Look to Netflix (NFLX), Hulu and iTunes for inspiration, but understand that building a platform that can manage the aggregation of dozens, if not hundreds of content sources is a complex exercise. Complex, but necessary, because these guys have set the bar high and consumers expect no less. The studios obviously have to buy into this, however and some – especially the cable networks – are still reticent to risk the golden goose of carriage fees for nascent online offerings.

Finally, our industry must embrace true cross-device portability. Again, Apple (AAPL) has set a high bar here, but I think it can be improved. When I have a subscription for premium content with my cable provider, I want to be able to access it freely on my portable media player, move it to my home theater or watch it on my PC.

This is the first step towards what I call “stateful content consumption.” I can program my DVR remotely, start a show at home and finish it on my phone, and bookmark my favorite clips like surfing the web. In order for this to occur the consumer electronics manufacturers and wireless providers need to jump in with both feet as well. This in turn triggers new requirements for DRM protection, different payment methods, and mobile bandwidth improvements.

"TV Everywhere" is a compelling catchphrase that means different things to different people, but at its core means, what I want, when I want, where I want.

Doing it right, means everyone needs to win – the content providers, the service providers and most importantly, the consumer.

MacIssac is CEO of ExtendMedia, a Boston-based company whose technology enables content providers and distributors to create, deliver, manage & monetize online content offerings over many devices.

The Mac and iPod slices shrank between '08 and '09. iTunes grew a bit. iPhone grew a lot.

Source: Company reports

Steve Jobs likes to describe Apple's (AAPL) business model as a stool built on three-legs: the Mac, the iPod and the iPhone.

But a quick glance at the 2009 Form 10-K, which Apple filed on Tuesday, shows that it is now more like a four-leg chair, with a couple of wedge-shaped pillows on the side.

The Mac and iPod still bring in the biggest part of Apple's total sales revenue — 37.7% and 22.1%, respectively — but their shares of the pie are shrinking.

The iPhone, meanwhile, is rapidly catching up, thanks to unit sales that grew 78% and GAAP revenue (swelled by deferred revenue dating back to 2007) that grew 266%. The iPhone now accounts for 18.5% of Apple's sales, just behind the iPod.

The fourth leg of the chair is the line item Apple calls "other music related products and services" but which is mostly iTunes Store sales — music, video and apps. It continues to grow at a steady pace and now represents about 11% of Apple's net sales.

Spreadsheets summarizing Apple's revenue streams are pasted below the fold. Apple's 2009 Form 10-K is available as a pdf file here.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Net sales by product in millions.

Source: Apple 10-K report

Share of total revenue by product.

Source: Apple 10-K report

Online jukebox Lala hooks up with Facebook and Google. Together, can they mount a serious challenge to Apple?

Lala's Nguyen aims to challenge Apple's iTunes. Photo: Lala

Apple rules music retail for now: iTunes passed Wal-Mart (WMT) last year to become the top-grossing music store in the world. But that doesn’t mean things will stay that way.

The latest challenge to iTunes comes from Bill Nguyen, the serial entrepreneur who founded Lala.com.

Palo Alto-based Lala is an online jukebox with 8 million songs; you can buy the rights to stream a radio-quality version of any song for 10 cents or download a higher-quality version for 99 cents. He says he’s averaging about $67 per year from paying customers.

By itself, Lala poses no threat to the iTunes juggernaut. But now it’s teaming up with Google (GOOG) and Facebook, arguably the two hottest properties online. Late today Google is expected to announce a partnership with Lala that should drive massive amounts of new traffic to the service.

And just last week, Lala announced that it will team up with Facebook and its 300 million users to push a new form of music distribution: song gifting. Soon, Facebook’s legions of social networkers will be able to do more than chat, update and poke — they’ll be able to buy each other songs, right within Facebook’s payment system.

We caught up with Nguyen soon after the Facebook announcement to ask about his vision for digital music, and why he dares to take on iTunes and Apple (AAPL).

Fortune: What’s the elevator pitch on Lala. What business are you in?

Nguyen: We’re a music service. But I think what makes us different from some other music services is we focus so much on helping you discover new music by using social behavior. There used to be such great radio and MTV that would help us find music, and a lot of those sources don’t really exist in the same way anymore.

So how long did it take this deal with Facebook to come together?

We’ve been having conversations with a lot of different partners about how to make Lala a part of what they do. There’s a lot of music out there — there are 8 million tracks. A lot of companies say, “there are 8 million tracks, come to our site and knock yourself out.” The reality is none of us have the time or the patience or even the knowledge to find what we want to listen to.

So we’ve been working for the last couple of years to try to add context. We launched a service with CMJ, we launched something with Pitchfork, we launched something with the guys at Billboard. And the reason why we did that is, those guys are curators. They were telling people what was good. In summer of this year, the conversations really picked up around, how can you connect with some much bigger websites? We’ve been talking to Facebook for almost a year about how to take advantage of all the amazing social features they have on their site. It’s been an ongoing process.

You’re going to be selling 10-cent song streams and 99-cent downloads. Right now you deliver about 5 million songs a month. What do you expect these new partnerships to do for your business?

It takes music and makes it a new product, in the same way that ringtones did. You buy ringtones to tell everyone else what you like, not for your own personal listening. So I describe it as jewelry, in a way. Gifting is like that. It’s a really cool way of expressing how you think.

We think what’s exciting about gifting is, people don’t have to even give us money. They can use the payment system already built into Facebook, which people are already using for everything from games to personal gifts already. It’s kind of like a greeting card. When you get it, it’s inside of your feed and you can listen to it.

So the social aspect is what makes this different from iTunes.

It is. We live in this age that I think is the best time for music, ever. It’s so much easier to create music because there are digital tools like pro audio. There are really no limitations for distributing your music like there used to be. You really don’t need a label or a studio to get your music out there. But iTunes doesn’t help you find out what to listen to. It just gives you the top lists. [Editor’s note: The latest versions of iTunes actually do include “genius” song recommendations based on your interests.]

Why are virtual gifts such a big deal?

Gifts are driven by events. I can give someone a song because I want to say something to them, personally. We think it’s so much more targeted than just browse and collect your music. It’s a very personal thing. And what’s nice about it is, it’s already happening. It’s not a new business model. Virtual gifts on the web are actually a really big business. It’s everything from what Facebook’s doing to Zynga with games. We think giving music is so much more tangible. People might not know what a virtual carnation is, but they definitely know what a song is.

How will the economics work for Lala? How much will you make from each sale?

I got in trouble for talking about it. I’m not allowed to talk about it anymore. But we’re happy with the relationship. One of the unique things about the Facebook relationship is they’re handling the billing and the credit card transactions. It’s a great deal. We’re really happy about it.

I’ve seen you quoted as saying it’s similar to the split that Apple does on apps in iTunes, so you get 70%, Facebook gets 30%.

I’m really not allowed to talk about it anymore.

You’ve also been working on some mobile stuff. What can you tell me about the iPhone app?

That’s a really good way to segue into some of the things we’ve been doing. On a mobile, it’s really not easy to get a song over the air. There are no free streaming services on the mobile platform [for streaming specific songs]. When you buy a song on Lala, whether it’s Facebook or anything else that we do, that music will be instantly available on a mobile device. That will be beginning with the iPhone.

It’s streaming. You’re hardly going to know the difference between that and an MP3 file. It’s flawless. There’s smart cacheing so it’s available offline for you if you’re in a bus or lose the connection. It’s pretty amazing.

Photo: Apple Inc.

Apple (AAPL) tends to score well in Piper Jaffray's "Taking Stock With Teens" reports, but the results of PFC's 18th semi-annual survey, released Tuesday, suggest that American teenagers are growing even more loyal to the Apple brand.

iPhones, iPods and iTunes emerged as clear winners in the Minneapolis-based brokerage house's study of the music and cellphone buying preferences of some 600 middle-class and upper middle-class teens.

"It's really a story about Apple," said Andrew Murphy, representing Piper Jaffray's technology team. "Apple continues to dominate."

Among the findings:

• 15% of the teens surveyed own an iPhone, up from 8% six months ago
• 22% planned to buy an iPhone in the next six months, up from 16% in April
• 87% own an iPod, up slightly from last year
• Of the 40% of teens who plan to buy an MP3 player in the next 12 months, 74% intend to buy an iPod and 13% a Microsoft (MSFT) Zune
• Most teenagers (57%) still download their music over peer-to-peer networks, but of those who buy their digital music legally, 93% use iTunes

If there was a weak spot in the survey for Apple, it was in the video games report. Despite Cupertino's concerted effort to market the iPod touch as a game machine, the console is still king among American teenagers. Fully 65% of those surveyed said they were unwilling to buy cellphone games, just slightly less than the 69% who said they had no interest in PC games.

The 600 high school students questioned about iPhones, MP3 players and online music were part of a larger survey of 11,200 teenagers interviewed online and in school. The 1,200 teens in the school survey came from households with an average income of $74,000 a year, representing the top 30% of U.S. households.

The 10,000 teens in the online survey — Piper Jaffray's largest to date — came from households with an average income of $52,000, which is closer to the U.S. median ($42,000).

"We believe that the teen demographic is a critical component of long-term growth in the digital music and mobile markets," wrote Piper Jaffray's Gene Munster in a report to clients issued Tuesday afternoon, "and Apple is taking its leading position in music and mobile markets."

Eminem. Photo: Imagine Entertainment

The dispute was over money, and like most civil cases, this one was settled out of court.

After five days of trial in a Detroit federal courthouse, Apple (AAPL) and Eminem's publisher, Eight Mile Style, came to an agreement Thursday night that neither side wants to talk about, according to the Detroit Free Press.

At issue were royalties on 93 songs that Apple has been selling on its iTunes music store under an agreement with Dr. Dre's Aftermath Records, which controls the rapper's sound recordings.

As Eminem's music publisher, Eight Mile Style had claimed copyright infringement. It was seeking to recover $2.58 million — its estimate of how much Apple has earned from sales of the music — as well as damages, which it set at $150,000 per infringement, or nearly $14 million.

Eminem, whose real name is Marshall Mathers III, was not officially party to the suit and did not appear in court.

The case dates back to July 2007, when Eight Mile Style sued Apple, alleging that digital rights to Mathers' songs had been sold without its approval.

The publisher had previously sued Apple for unauthorized use of his hit single "Lose Yourself" in an iTunes TV commercial. That dispute was also settled out of court.

During the course of the trial Apple's attorney revealed that Aftermath has been receiving 70 cents per download and Eight Mile Style 9.1 cents. Apple's attorney said that the publisher had been cashing its checks, which over the years amounted to "a lot of money."

See also:

• Apple and Eminem square off in court

Source: Apple Inc.

Steve Jobs likes to wait for nice round numbers before he announces his milestones, and on Monday Apple (AAPL) hit a big one: the 85,000 apps in the iPhone App Store have now been downloaded more than 2 billion times — a number Jobs described as "staggering."

"The rate of App Store downloads continues to accelerate," he said in a prepared statement, pointing out that more than half a billion apps were downloaded in Apple's fourth fiscal quarter alone.

He's right about the acceleration, but judging from the slope of the curve above, it's not quite as dramatic as he makes it sound.

It took Apple 74 days to rack up these half billion downloads, and 82 days to get the previous half billion.

Put another way, users were downloading apps at the rate of 6.1 million a day between April 23 (when the App Store hit 1 billion) and July 14 (when it hit 1.5 billion), and the rate of 6.7 million a day between July 15 and Sept. 26, a 10% increase.

Impressive, but given how many customers Apple has added in the past quarter, maybe not staggering.

Among the other numbers Apple announced Monday:

• Apple has sold more than 50 million iPhones and iPod touches (up from 37 million in April)
• The App Store is available in 77 countries
• There are 125,000 registered iPhone developers (148Apps.biz counts only 20,583 active publishers, but some publishers employ many individual developers)

You can read Apple's press release here.

See also:

• How the App Store got to 1 billion downloads
• How Apple's App Store got to 1.5 billion downloads

Photo: Aftermath Records

[UPDATE: The trial has begun. See below.]

Barring a last-minute settlement, Apple will face Eminem's music publisher in a Detroit courtroom this morning.

At issue are royalties on 93 songs that Apple (AAPL) has been selling on its iTunes music store under an agreement with Dr. Dre's Aftermath Records, which controls the rapper's sound recordings.

Eight Mile Style LLC, Eminem's music publisher, claims copyright infringement and is seeking to recover the $2.58 million it estimates Apple has earned from sales of the music plus damages, which it set at $150,000 per infringement, or nearly $14 million.

Apple had hoped to cut a deal — and avoid a trial — in private settlement talks supervised by U.S. Magistrate Judge Virginia Morgan. But those talks broke down Wednesday night, according to the Detroit Free Press.

The non-jury trial was scheduled to begin at 9 a.m. ET in the courtroom U.S. District Judge Anna Diggs Taylor. It's not clear whether Eminem, whose real name is Marshall Mathers III, will testify.

The dispute dates back to July 2007, when Eight Mile Style and Martin Affiliated sued Apple, alleging that digital rights to Mathers' songs were sold without their approval. A copy of the suit is available here.

The music publisher had previously sued Apple for unauthorized use of his hit single "Lose Yourself" in an iTunes TV commercial. That dispute was settled out of court.

UPDATE: Courtroom reporting from the Detroit News:Paul Egan of the Detroit News writes:

In his opening statement, Eight Mile attorney Richard Busch said unique wording in Eminem's contract with Aftermath Records requires the record company to get separate deals before it can sell downloads of Eminem's songs over the Internet.

The record company "knew that they did not have the right to make these songs available for digital download without a separate digital download agreement," Busch told U.S. District Judge Anna Diggs Taylor.

But Apple attorney Glenn Pomerantz told the judge the case is all about greed and Eight Mile Style wants the court to ignore the plain language of the record contract.

"What is really at issue in this case is that they want Apple's profits," Pomerantz said. "That's what they are here asking for."

Eight Mile Style was paid 9.1 cents for each music download covered by its contract with Aftermath and continued to cash checks that included such revenue even after it filed the federal lawsuit in 2007, Pomerantz told the judge. (link)

Tyrese Gibson's Mayhem is a comic book – the first standalone print publication for sale in Apple's iTunes LP format.

Tyrese Gibson’s Mayhem is the first digital book for sale on iTunes 9 – perhaps an early sign of Apple’s (AAPL) desire to take on Amazon’s (AMZN) Kindle and Sony’s (SNE) Reader in the digital book market.

I would have missed the significance of Mayhem on iTunes if I hadn’t run into Gibson himself on Wednesday. After the Steve Jobs iPod keynote, I spotted the actor/singer known for roles in action movies like Transformers 2 in the demo area where attendees were playing with the new iPods and software. He had a laptop open and was doing a few TV interviews about his Mayhem project, and its debut on iTunes.

Gibson isn’t the first person you’d expect to make a mark in the comic book business. For one, he’s not a longtime comic book fan – he only recently got interested in the medium while attending the Comic-Con convention to promote the movie Death Race. After seeing the devotion of die-hard fans there, he was determined to get in on the action – and he conceived of Mayhem, a vigilante tale with a diverse cast of characters.

Take a look at the Mayhem comic iTunes LP ($1.99), and it’s easy to see the potential of book or magazine sales over Apple’s digital store. For starters, Apple has amazing reach – there are more than 100 million iTunes accounts connected to credit cards, which is a sizable audience. In the Mayhem iTunes LP itself there is a beautiful flow to the action; new panels zoom into the foreground as others fade away.

And it’s not just text and images; both audio and video come along with the package. The interface is designed so that it would obviously work nearly as well on a touch-sensitive tablet – or even on an iPhone – as it does on a full-fledged PC.

Perhaps that’s because Apple itself had a hand in designing this digital version. While hanging out with Gibson, I also briefly spoke with the two creators of the Mayhem iTunes LP, Sam Herz, one of Apple’s user interface engineers for the iTunes Store, and Barry Munsterteiger, creative director for rich media and Internet technologies.

The pair said that while working on Mayhem, they created some tools based on standard web technologies like HTML, Javascript and CSS that others might be able to use to create iTunes LPs. But they’ve since turned over their work to higher-ups at Apple, and they’re not sure what will happen to their work.

They might not know, but we can hope: Though CEO Steve Jobs has publicly talked down the idea of Apple building an e-book, he hasn’t closed the door on a multi-purpose device that does the same thing – something that might look like an oversized iPod touch. Maybe the tools Apple created to digitize Gibson’s Mayhem comic will be part of an author’s kit with that oft-rumored Apple tablet?