According to the FT, the “full-featured” tablet is being prepped to launch alongside a next-generation digital album format Apple (AAPL) is cooking up with the four largest recording companies, one designed to gin up sales of CD-length music.

“Cocktail,” as the project is known, is a new music format that will gather songs, photos, lyrics sheets, video clips and liner notes into a sort of interactive booklet. Said one executive familiar with the effort: “It’s all about re-creating the heyday of the album when you would sit around with your friends looking at the artwork, while you listened to the music.”

…skipping through nine middling-to-lousy songs to reach that one that inspired you to shell out for the album.

Which begs the question: Can that heyday ever be recreated? Now that we’re accustomed to purchasing only the music we want via the thin-margin, 99-cent-song-by-song downloads that iTunes pioneered, can we ever be convinced to pay a premium for bundled music, cluttered up with a bunch of liner notes, wacky band photos and throw away filler songs?

[Image Credit: Apple Insider]

Chuck: Do we carry any Rush CD’s?

Morgan: No, but not to worry buddy! I have every Rush track on my Zune.

Chuck: Wait, you have a Zune!?

Morgan: Pfft! No, I’ll go get my iPod.”

– Some recent dialogue from NBC’s “Chuck” (see video below)

Microsoft is adapting its Zune digital music player to the “realities of the market”–those created by recent turmoil in the economy, as well as the harsher ones created by Apple’s (AAPL) iPod juggernaut. It’s slashing prices across the Zune line in the hopes of protecting holiday sales.

Once priced at $199, the 16GB Zune will now sell for $179. It’s 8GB counterpart will sell for $139, down from $149. And the 4GB Zune will sell for $99.

The price cuts come just two months after Microsoft (MSFT) introduced the third-generation Zune platform. “Hopefully we have a good holiday season,” Zune marketing director Adam Sohn told CNet’s News.com. “We’re trying to take into consideration what the realities of the market are.”

Those realities being as harsh as they are, is $10 to $20 off really going to be enough to trump financial concerns and temper long-running consumer disinterest in the device?

If the [iTunes music store] was forced to absorb any increase in the … royalty rate, the result would be to significantly increase the likelihood of the store operating at a financial loss–which is no alternative at all. Apple has repeatedly made it clear that it is in this business to make money, and most likely would not continue to operate [the iTunes music store] if it were no longer possible to do so profitably.”

– iTunes vice president Eddy Cue

Not that it would ever have happened anyway, but Apple (AAPL) will not be shutting down the iTunes Store in protest over increased royalty rates paid to songwriters and publishers for CDs and digital music downloads. The Copyright Royalty Board Thursday left the rate for royalties unchanged at nine cents a track, paying no mind to a proposal by the National Music Publishers’ Association that would have raised it to 15 cents–a 66 percent hike.

Seems Apple’s posturing paid off. Said Apple spokesman Tom Neumayr, “We’re pleased with the CRB’s decision to keep royalty rates stable.”

This morning the company announced slotMusic, a compact memory card-based music format that can be played on cellphones, PCs and some MP3 players. It relies on MP3s without digital rights management schemes and is backed by Universal Music Group, Sony BMG Music Entertainment, Warner Music Group and EMI Group, all of which apparently believe that more physical media is the best way to reinvent their business model in the era of digital distribution. Though as SanDisk VP Daniel Schreiber notes, they do have their reasons. “There’s a billion phones out there and a lot of them can play music and a lot of them have a microSD slot,” he explained. “We think there’s still a need for a tangible, physical product. People will appreciate walking out of the store playing music on their phones.”

Perhaps. But will they appreciate carrying that music around on a 0.6″ x 0.4″ medium that’s about the size of a fingernail? Seems easy to lose, doesn’t it (maybe Case Logic is planning a slotMusic binder)? And wouldn’t they rather carry around hundreds of songs, instead of the dozen or so stored on each slotMusic card? And what if the memory card in their phone is already in use, filled up with contacts, applications and other data? What then? And beyond this, haven’t iTunes and Amazon MP3 made consumers more accustomed to purchasing music à la carte? Why purchase a full album at $15, when all you really want are the only two good songs on it?

The deal is an interesting one, and for a number of reasons. Unlike Brooks–or The Eagles or Journey, who have similar pacts with Wal-mart–AC/DC is still under contract to Sony (SNE) BMG’s Columbia Records. By inking such a deal, Columbia almost certainly risks alienating other retailers, who can’t be happy to see AC/DC’s first album of all-new material in eight years become a Wal-Mart exclusive. Among those retailers: Apple’s (AAPL) iTunes Music Store, where AC/DC has so far refused to distribute its music.

The deal also comes at a time when Wal-Mart and other big retailers are reducing their CD shelf space. It’s been estimated that Wal-Mart, Circuit City (CC) and Target (TGT) have cut between 5 percent and 23 percent of their CD inventory in the last two years. Which means that retail exposure, which was once a given for many bands, is becoming increasingly dear. So much so that it’s a negotiating point, and–in Wal-Mart’s case–enough of one for big-name acts to justify allowing the retailer to sell their new releases on an exclusive basis.

“Shelf space has shrunk so much over the last five years that for anyone to give you shelf space and exposure is a big deal,” Terry McBride, chief executive of Nettwerk Music Group, recently told the New York Times. “Should the labels be worried? There’s been a move away from the labels for a number of years now. And it’s not necessarily their fault. The shelf space to have those records sell just isn’t there. That’s the market reality.”

What’s more, it’s now the largest music retailer in the states. Which means it’s bested Wal-Mart (WMT) for the top music-retailer spot.

Apple offered up this news with a bit of a reality-distorted caveat, though. The latest NPD Group data on which its claims are based was culled from the research outfit’s MusicWatch survey, which counts one CD as representing 12 tracks.

As of this writing Wal-Mart’s list of 10 top-selling CDs includes many that feature more than 12 tracks–some with more than 20, and one that boasts more than 35.

And 80% would pay for a legal subscription-based music service that would allow them to discover, swap and recommend music.

Which, if true, illustrates the great disparity between the consumer and industry views of digital music. Because according to the Hertfordshire study, consumers–at least those in this particular age group–view digital music on the Internet as a sort of giant mixed tape to be explored and shared. They don’t have much of an emotional connection with it: “Respondents seem to attach a hierarchy of value to different formats of music, with streaming-on-demand the least valuable (though still valued); ownership of digital files somewhere in the middle; and ownership of the original physical CD the most valuable.”

The recording industry, of course, has failed to recognize that hierarchy. When, and if, it does, the study notes, it may finally succeed in monetizing that mixed-tape ethos that’s befuddled it for so long. “Survey responses suggest that respondents would continue to purchase CDs and go to gigs, even if they subscribed to a legitimate peer-to-peer file-sharing service,” the survey adds. “Fans want to support or pay tribute to their favorite artists and ownership of a digital music file does not necessarily do justice to their sense of devotion.”

Now, given the vast discrepancy between LP and CD units shipped in the past year, it’s entirely unlikely vinyl will ever claim a significant share of the music market–unless Apple (AAPL), for some reason, develops the iPod Phono. But it may well remain a niche market for some time to come thanks to audiophiles who prefer the LP “experience” and its so-called truer sound.

And so today Best Buy (BBY) is testing vinyl sales at some of its stores, as is retailer Fred Meyer (KR). “It’s not just a nostalgia thing,” said Melinda Merrill, spokeswoman for Fred Meyer. “The response from customers has just been that they like it, they feel like it has a better sound.”

At the Music Matters confab in Hong Kong, McGuinness slagged broadband Internet service providers, accusing them of aiding and abetting music piracy while CD sales and royalty payments to musicians plunge. “The recorded music industry is in a crisis, and there is crucial help available but not being provided by companies who should be providing that help–not just because it is morally right, but because it is in their commercial interest,” said McGuinness, adding that Internet service providers have been “turning their heads” away from the music industry’s troubles. “One way or another, ISPs and mobile operators are the business partners of the future for the recorded-music business. But they are going to have to share the money in a way that reflects what music is doing for their business. The music business once had to bear the accusation that it was full of dinosaurs who looked back to an old business model rather than embracing a new one,” McGuinness said. “Today, though, it is the music business that is charting the way to the future. If there are dinosaurs around today, I think they are the Internet free-thinkers of the past who believe that copyright is the great obstacle to progress, that the distributors of content should enjoy profits without responsibilities and that the creators and producers of music should simply subordinate their rights to the rights of everyone else.”

By Internet free-thinkers, McGuinness presumably means those crazy longhairs in Silicon Valley whom he accused of destroying the recorded music industry in another keynote address back in January. “Embedded deep down in the brilliance of those entrepreneurial, hippy values seems to be a disregard for the true value of music,” he said at the time. “I suggest we shift the focus of moral pressure away from the individual P2P file thief and on to the multibillion dollar industries that benefit from these countless tiny crimes: the ISPs [internet service providers] the telcos [telecom companies], the device-makers. … We must shame them into wanting to help us. Their snouts have been at our trough feeding free for too long.”

Out of the car, longhair …

This morning, Sony BMG became the second record label to jump on board the Finnish phone giant’s Comes With Music offering, which–when it launches in the second half of 2008, will package mobile phones with a year of unlimited access to music. There are, however, certain caveats to that value proposition, as I pointed out last December:

Though Comes With Music does indeed permit owners of certain Nokia cellphones to download as many songs as humanly possible in one year (with no per-song data charges), transfer them to a PC and keep them at the end of that time, they must pay a per-song usage fee to burn them to CD. What’s more, the songs are wrapped in Microsoft’s (MSFT) ironically named ‘Plays for Sure’ digital-rights management scheme, which prevents them from being played on the iPod, Zune, etc. Finally, another 12 months access to the music catalog requires the purchase of a brand new phone.”

Clearly, Sony, like Universal (VIV.PA) before it, doesn’t see these issues as off-putting to consumers. “When you give consumers the key to the candy store without any limitations, there’s a lot more opportunity for discovering music that you might not have found before,” said Thomas Hesse, president of global digital business and U.S. sales for Sony BMG Music Entertainment. “We think this will energize the discovery of music.”

It might energize Sony BMG’s bottom line a bit as well. When Universal first signed up for Comes with Music, sources close to the company said that Nokia would pay the label up to $35 for every phone that offers access to its library. Nokia subsequently denied it was paying that amount, but it’s definitely paying something–to Universal, Sony and whatever other labels it manages to line up for the service.