"All they need to do is license their stuff at dirt cheap rates to all-you-can eat subscription services like Spotify and MOG."

That was the advice given at MediaMemo to labels that may want to break Apple's stranglehold on digital downloads. "Sell that stuff at the right price -- A buck a month? Two bucks? -- and everyone buys in, and no one ever thinks about buying songs from iTunes again. Poof!"

Here's why that's the wrong approach.

The over-pricing of music is a popular theme in certain circles. For example, just about any article on Pandora has adjectives like "unreasonable" and "draconian" in reference to webcasting rates. Forget that Pandora turned a profit and co-founder Tim Westergren has been publicly positive about rates established in last year's settlement. The common perception is music simply costs too much. Their solution? Slash prices.

Cutting prices for subscription services isn't a good solution. First, it would probably be unwise to give such a low price to the early adopters who place the greatest value on the service in the first place. Second, it goes against the logic of the freemium model upon which many services are built. Consumer who places little value on a music service already have a free, ad-supported version. This two-tier system allows services and labels to discriminate between low-value and high-value customers. Third, the price of these products will need to start high so they can eventually drop as late adopters enter the market.

Labels have all sorts of levers they can pull. Price is just one lever -- and it's not a cure-all. Instead of dropping prices, let Apple's competitors step up and create valuable products and services. In fact, this is exactly what is happening with cloud-based music services. Apple's acquisition of Lala is clearly a competitive reaction to the rise of Spotify and other cloud-based competitors. So rather than slash royalty rates for subscription services in order to reduce Apple's digital music footprint, labels should encourage competitors to rise up and challenge Apple's dominance.

And "everybody" will buy in? Not a chance. Tech bloggers always sell this story. Don't buy it. Conversion rates won't be anywhere close to 100% even if the price is $2 per month -- not unless it is a federally mandated charge to a mobile or broadband bill.

"We're a decade past Napster, but they'd still prefer to sell compact discs, and failing that, individual songs," the post later reads, referring to record labels. "And they'd rather put up with Apple's dominance than risk any of those sales"

The truth is labels may complain about Apple, but cooperating with the company has been very good for business. Bitter cooperation is simply a part of business -- not just in music but elsewhere.

And would labels prefer to sell CDs? It doesn't hurt that people still want them and they carry a wholesale price higher than digital albums. In short, labels and distributors continue to sell CDs because there is continued demand for the product. They continue to sell albums, too. In contrast, there is little proven demand for the sexy, over-hyped subscription services many journalists believe or currently positioned to save the record labels and return revenues to an upward trajectory. As for legal P2P, another concept beloved by impatient journalists, it is a possible outcome that will require many years of discussion and negotiation.

The truth is labels are forced to play a difficult balancing act. They have to sell both CDs and digital downloads while pushing new digital models. They need to license their music at rates that both nurture Internet radio and subscription services and challenge them to improve their revenue models (rather than set the bar so low it's easy to clear). Labels have a poor track record of doing this balancing act but are slowly getting better. It's a difficult and inescapable position.

But to stop selling CDs in order to focus solely on digital would be dereliction of duty. It was a bad idea when Gartner's Mike McGwire suggested it in late 2008 and it's still a bad idea today. Labels do need to give more autonomy to digital business develop teams and allow them to grow digital revenues without kowtowing to the physical side of the business. But they don't need to stop selling CDs just because Apple's download market share is 70%.

Questions? Comments? Let us know: @billboardbiz

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