Apple's icloud puts rivals in the shade

Steve Jobs came out of sick leave yesterday to launch Apple's digital music storage service. Stephen Foley reports

From makers of music to manufacturers of personal computers, Apple's much-hyped launch of its iCloud digital storage service has potentially profound consequences for business. No one (with the possible exception of Steve Jobs, Apple's chief executive and a maestro of hyperbole) would claim that iCloud is a revolution in itself, but it might just be the moment that defines a revolution.

For years, increasing quantities of the music and video we consume, the software we use and the personal data and emails we store have been situated not on our own computers but out there on the internet – in "the cloud", as they say (although they actually mean in vast warehouses of high-power computers owned by Google, Apple and others). Now that Apple has blessed the cloud, and the four major music labels have blessed Apple's version of it, large numbers of the 200 million people with Apple iTunes and App Store accounts could be tempted to shift storage of their music and film and photos on to Apple servers, so they can listen or watch on any computer, phone or tablet.

"Keeping these devices in sync is driving us crazy," Mr Jobs said at Apple's developers' conference. "We have a great solution for this problem. We are going to demote the PC to just be a device. We are going to move the digital hub, the centre of your digital life, into the cloud."

The tech industry veteran and pancreatic cancer survivor, who has been on medical leave from Apple since January to fight an undisclosed ailment, appeared on stage to rapturous applause, and to the soundtrack of James Brown singing I Feel Good. He said iCloud would be free, except for music not purchased from iTunes, for which storage would cost $24.99 per year in the US. Apple also unveiled Lion, a new version of its operating system for Mac computers and a new operating system for iPhone, but it was the iCloud that Mr Jobs left for the climax of the presentation.

"With Apple, it's not about being first to market; it's about being better," said Mark Moscowitz, a technology analyst at JPMorgan Chase. "The company's mantra is to be the first to provide and sustain enhanced, user-friendly experiences. Apple achieved this successful differentiation with the iPod, iTunes, iPhone, and iPad. Apple entered each market after other vendors, but created a better user experience."

Apple already runs MobileMe, a cloud storage system for documents which lets users access their work on any internet-connected phone or computer. The new iCloud is simply an extension of this service to allow media files as well as documents. Apple's deal with the major record labels – under which it is offering to split iCloud revenues 30-70 in favour of the labels, and has agreed to pay advances of up to $150m, according to some reports – means that users won't have to laboriously upload all their songs from hard-drive to iCloud. Instead, they will appear automatically. That is not something Google or Amazon, which have launched similar cloud storage offerings in recent months, are being allowed to do. "We think this competitive advantage will help Apple separate its cloud offering from the pack," Mr Moscowitz told clients in a research note.

Amazon launched its Cloud Player for music in March, offering the first 5Gb of storage free (more if you fill it with music bought from Amazon's own MP3 store). Google launched Music Beta last month, complaining that it had not been able to reach agreement with record labels and so was offering only a simple storage facility, instead of the music-buying and sharing options it hoped to add.

The battle between Apple, Google and Amazon to attract customers to cloud storage services has given the beleaguered music industry some rare bargaining power. By taking a cut of Apple's iCloud revenues, the industry finally gets to make a little money, even on music that has been illegally downloaded over the past few years. It could also give a boost to paid-for downloading from iTunes. Any additional music-sharing or discovery services Apple launches may provide further incremental revenue.

"The revenues of a single play of a track are less than from the sale of a track," said Marija Jaroslavskaja, a broadband media analyst at Screen Digest, the research firm. "But with CD sales in decline, every new business model bringing in new revenues to compensate for that decline is a plus."

In fact, the music industry is cock-a-hoop at finding a rich new source of income from music licences. "This is a huge win for the industry," said one executive at a major label, as Mr Jobs began his speech yesterday. "We pray that iCloud is good, because Google and Amazon are going to have to follow to be competitive."

The money Apple has agreed to pay for iCloud's use of licensed music is higher than Google was talking about paying, before the negotiations broke down in acrimony. Now it is likely to have to return to the table at a higher price point. The new bargaining power of music labels also makes it less likely that they will soon reach a deal with Spotify, the European music-streaming service which has been trying to win the licensing agreements it needs to launch in the US. It could also increase pressure on the likes of Pandora, which creates personalised online playlists for its 34 million listeners and which is currently pursuing a $142m stock market offering in the US.

But it is not just the music makers and the new generation of distributors of digital music that will be affected by the launch of iCloud and its rivals. It could also change the dynamics of the technology hardware industry. We could be entering an era of new, lightweight and cheaper devices, belives JPMorgan's Mr Moscowitz. "If iCloud serves as primary storage for this data, then the PC's internal storage will not require as much capacity, particularly in notebook PCs," he said. Devices that currently require hard disks could switch to solid state drives, smartphones would no longer require large storage capacity for users' music – and Apple might even be able to launch a cheaper iPhone. Not a revolution, then, but an important moment in the revolution.

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