There's no doubt that Apple is flying high.

In addition to muscling a sweet deal with the industry's four largest music distributors (Universal Music Group, Warner Music Group, EMI Group, and Sony BMG Music Entertainment) to continue selling songs in its iTunes store for $.99, its brawl with France, over whether copyrighted work like music on iTunes, needed to be interoperable, was for all practical purposes made moot.

If three times is the charm, Apple must have the champagne chilling in preparation for a victory in its ongoing legal tussle with the Beatles.

For iTunes fanatics, this is a mixed blessing. The good news, of course, is that the cost of individual music downloads remains infinitely affordable. The bad news is that Apple's much-loathed proprietary digital rights management (DRM) scheme will remain firmly in place. Mixing his metaphors but nonetheless capturing the spirit of what transpired, Ted Schadler at Forrester Research was quoted as saying, "Apple has all the cards, and when you have all the cards, you can play hardball."

Just look at the numbers to see why Steve Jobs must be gleeful. For fiscal 2005, Apple generated revenues of $14 billion and a net profit of $1.3 billion. This represented a whopping annual growth of 68% and 384%, respectively--and was the highest annual revenue and net profit in its history.

With 45 million iPods sold and iTunes representing more than 80% of the digital downloads sold in the United States alone, Apple is now the 800-pound gorilla in the digital music world. Tim Lee of Techliberation argues that the music industry created a monster when it demanded a strong DRM system for iTunes music. Because it locks music lovers into Apple's proprietary platform, Apple may soon be able to bypass the record labels completely and cut deals with artists themselves.

But is Apple shooting itself in the foot by maintaining its proprietary standards? "We've seen this movie before," says Michael Robertson, founder of MP3tunes, which provides individuals with a "personal music locker" with online storage that works within iTunes. Robertson was referring to the fact that a company that has created an industry often gets sidelined to a bit part in that very market. Indeed, Apple doesn't have to look far for an example. But "it's just not in [Jobs'] DNA" to open up, say Robertson. It's therefore inevitable that other device makers will eventually catch up and other services will deliver cheaper, easier-to-use, or flashier functionality. As a case in point, Napster unveiled a free, advertising-supported Internet music service just this week.

As the digital music pie continues to grow, competition will only increase. According to the Financial Times, online music sales mushroomed almost 200% last year, while at the same time DVD sales fell 4%. Digital music hovers around 5% of the revenues of the major labels--but that percentage is expected to grow exponentially in the next 12 months. There's some awfully attractive gold in them there hills.

Others argue whether the flat download fee is really as good for consumers as it seems on the surface. As Reuters points out in an investment note, the scheme the record labels favored--charging more for more popular songs--might in the long run have been better for music buyers. After all, 45% of all music is purchased by people 35 and older. As they're arguably interested in buying songs from the back catalogue, in the long run they may end up paying more per download at the flat $.99 rate than if they had been offered discounts for the older, less popular tunes.

If you're interested in this topic, check out the video of a panel discussion on digital music distribution held at the On Hollywood summit that took place yesterday (unfortunately, the event happened past deadline for this note). Although Apple declined to participate--the moderator says she's going to put an empty chair with a big apple on it to represent Apple's absence--the impressive list of panelists includes David Goldberg of Yahoo! Music; Laura Goldberg of Napster, Jordan Greenhall of DivX, David Pakman of eMusic,and Michael Robertson of MP3tunes. Should be interesting.

This discussion is obviously not over yet, and more music models will inevitably make their mark.