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iTunes Store a greater cash crop than Apple implies?

A subscription model could add $900 million in revenues per year

Another source of incremental iTunes revenue could arrive in the form of an iTunes subscription service. According to the report, Apple has already developed and is capable of launching such a service but has thus far found no compelling reason to do so. However, Hargreaves believes that an increase in competitive offerings and pressure from iPhone mobile carriers could force Apple add the service within the next 18 months.

"Carriers are in the unique position of having a network that can deliver music, a captive customer base of billions of people, and ubiquitous devices that are capable of playing music," he wrote. "We expect approximately 1 billion music-enabled phones to be sold next year. As network speeds increase, battery life on cell phones improves and storage grows, we believe that music offerings from carriers will become extremely viable competitors with iTunes."

However, the analyst believes an iTunes subscription service could prove to be beneficial to consumers while helping to monazite the iPod install base, rather than simply representing a defensive move on Apple's part. Based on a customary 50/50 split of a $10 to $15 monthly subscription charge between Apple and the labels, the iPod maker could see $900 million in added revenue should such a service penetrate to just 10 percent of its iPod base.

Keep an eye on April 28

Hargreaves in his report hinted that some of the aforementioned changes could arrive sooner than later. He notes that Apple launched iTunes on April 28, 2003 and that it typically negotiates one-year contracts with the labels. "As a result, we believe that the company is currently in renegotiations for its current contracts. Apple will likely maintain its firm grip on digital music in the near future, regardless of whether changes to iTunes are included in the current round of negotiations," he wrote. "However, 80 percent of music is still purchased in physical form, which suggests that the digital music market is still young. If Apple intends to keep its hold on digital music over the long term, we believe it will eventually have to become as innovative with iTunes as it has been with its hardware."

Apple priced at $130 a share

Hargreaves maintains an outperform rating and $130 price target on shares of Apple for PacificCrest.