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New Apple hire foreshadows possible iTunes subscription service

Apple Computer has made a key hire in its quest to deploy a subscription-based iTunes music service, luring Julia Miller from Microsoft's XBox Live team.

At Microsoft, Miller was responsible for the worldwide marketing and sales programs for Xbox Live, the world's first broadband-only online gaming service. Like several of today's emerging online music download services, XBox Live is based on a monthly subscription model.

According to industry insiders, Miller left the Redmond, Wash.-based software giant for Apple in early March. Sources close to Apple later confirmed that Miller had joined the company, but were unable to produce details pertaining to her new job function. In brief conversations with other publications, Miller refused to confirm her previous employer and her present-day title at Apple.

During her two-and-a-half-year stint on Microsoft’s XBox Live team, Miller was influential in the branding and successful launch of the service. She brings to Apple more than fifteen years of consumer sales and marketing background, including extensive experience with SegaNet, the first online console gaming service.

Rumors have suggested that Apple has been quietly preparing a subscription-based model for its iTunes music store. Insiders expect the company to introduce the service later this year in an effort to compete with similar services from Real Networks and Napster, which offer subscribers access to an unlimited number of music downloads for a small monthly fee. The subscription service would coexist alongside Apple's already successful 99 cents per song model, sources said.

The potential for an iTunes subscription service has been a topic of conversation amongst industry analysts in recent weeks. Many question the economic significance of the subscription model and whether iTunes could benefit from offering consumers a choice in payment structure.

In a research report released to clients last week, Merrill Lynch analyst Steve Milunovich downplayed the potential of the subscription-based sales model, but said he believes Apple can establish a subscription service with few barriers to entry. "Record label executives we spoke with believe the market could be bimodal with the majority people choosing to purchase and a niche for subscription services," the analyst wrote in his report.

Industry insiders AppleInsider spoke to said Apple has nothing to lose by offering a subscription model and is aggressively following a plan that would have the service launched by the end of the year. They believe the only major obstacle at hand is developing a version of FairPlay — the company's proprietary digital rights management software — that is compatible with a subscription service. "[Apple] stands to lose more by not offering consumers the choice," said one industry source, who believes Apple could wind up dominating the music download market with a 90% share via a bimodal service offering. The company would also need to ink new licensing agreements with record labels to include songs "rented" under the subscription model.

Given Apple's strong relationship with the labels, insiders say Apple's goal would be to offer 100% of its music catalog through its subscription service. Competitive services are currently able to offer up to two-thirds of their catalogs in their subscription plans because of licensing restrictions. According to sources, Apple would likely be negotiating terms where the labels would receive approximately 5 cents for each song downloaded and transferred to a music device, per month. By comparison, insiders say Apple surrenders approximately 64 cents to the labels on each of the songs it sells for 99 cents. Apple has said that iTunes has been operating at close-to break even, but has showed a slight profit in recent quarters.

Prior to joining Microsoft, Miller spent five years with Pepsi Co., where she led strategic initiatives and major branding campaigns for both Pepsi and Pizza Hut. She also played a major roll in the initial launch strategy of the point-of-sale (POS) technology in the grocery store environment for Citicorp, providing flexible payments and efficient marketing strategies such as the Safeway Preferred Card.