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As part of Apple's effort to rectify the shortcomings of its iPhone, the company has approached major music labels to try to expand the variety of ringtones and other musical features available on the device, according to several executives at the record companies. The negotiations are very active and a final deal has not been reached, said the executives, who requested anonymity so as not to disrupt the talks.
"They want a big launch in June," said one label executive familiar with the talks. That executive said a deal might come after June 9, when Apple's chief executive, Steve Jobs, speaks at the company's developers' conference, a logical date for the introduction of the next generation of iPhone. An Apple spokesman declined to comment.
Ringtones are a very profitable corner of the music business because the price for a short segment of a song is higher than for the full song. In the United States, for instance, Apple offers ringtones as a 99-cent upgrade to its regular 99-cent music tracks, but not all tracks can be converted into ringtones. Apple is looking to expand its inventory, the executives said.
The company is also hoping to add answer tones, also known as ring-back tones -- songs that a caller hears instead of the "ring ring" sound while waiting for someone to answer. In some cases, these command an even higher wholesale price from the record labels than ringtones do.
Also under discussion is whether Apple can sell songs from its iTunes Store directly to iPhones using new, faster mobile broadband networks, supplementing current sales over Wi-Fi and fixed Internet connections. The next generation of phones is expected to use so- called third generation, or 3G, technology, which has long permitted mobile song downloads in Europe and Asia. Here, too, music labels argue that they should be paid more for an over-the-air download than a standard track bought on the Internet, where the wholesale price is about 70 cents.
All sides understand that the stakes are significant. Apple, which is the dominant player in digital music, is growing fast as a mobile phone maker. Expectations are high, maybe impossibly so, for the next generation of iPhone.
Apple has arranged deals with carriers in most of the world. The investment firm Piper Jaffray estimates that Apple now works with carriers that reach 575 million cell phone users, up from 153 million potential users in the six countries in which the iPhone is now sold.
But the wireless market is vast, and other carriers and phone makers are trying to add music features to their phones and services. So if Apple holds out for terms that the labels will not agree to, it risks losing momentum on music on phones. That is particularly true in Europe, where Nokia and Sony Ericsson are strong and the initial reaction to the iPhone has been tepid.
A label executive said the current negotiations, which began only a few weeks ago, might be the opportunity for the music companies to press Apple on some of their other longstanding requests.
Top among them is the flexibility to set different prices on individual tracks. All tracks on iTunes now sell for 99 cents in the United States. Apple does allow for variable prices for full-album downloads as well as various bundles. The labels love to add extra artwork, bonus cuts or other features that raise the price of a digital album.
Apple has loosened its pricing structure a bit. It is selling some television shows from HBO at $2.99, above the $1.99 for which it sells all other TV shows. The music labels would like to argue that this should allow them to charge more than 99 cents for hit songs and less for older works. But there is no evidence Apple sees it that way.
Meanwhile, Universal Music Group is still pressing to get Apple to consider bundling a monthly music subscription with some of its iPhone and iPod models. Under this idea, an iPhone might come with the right to download and listen to any song from the major labels for a period of a year or two. Two executives said this option was still under discussion, but it was unlikely to be part of whatever mobile music deals were announced in June.
The gap between what Apple wants to pay and what the labels think such a service is worth is still far too wide, the executives said.
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