Commentary: Getting on the same sheet of music

By Josh Bernoff, Principal Analyst

RealNetworks on Monday announced Harmony, a technology that lets music purchased on the RealNetworks Music Store work with Apple Computer's iPod portable music players as well as portable players that support rights-protected Windows Media files.

By linking currently incompatible music formats from Apple, Microsoft and RealNetworks, Harmony helps consumers avoid being locked into music and portable players that only support one secure format, like Apple's. Harmony will boost RealNetworks' sagging position and pressure Apple, Sony and Microsoft to make similar moves.

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With Harmony, the RealNetworks Music Store can convert files from its native format to Apple's and Microsoft's secure music formats, allowing it to support iPods and Windows Media portable players. The result: a boost for RealNetworks, and pressure on its competitors to improve compatibility:

• RealNetworks gets a short-term advantage. Right now, Apple's music store dominates online sales; RealNetworks' share isn't significant. Supporting both iPods and competing music players gives the company a unique advantage for consumers seeking to avoid lock-in. Another result: RealNetworks' media player will win back some people currently using the default choice: the Windows Media Player.

• Labels encourage further format rapprochement. RealNetworks made Monday's announcement with the endorsement of music labels, which trust RealNetworks to convert content among secure formats while maintaining their rights protections. Compatibility benefits labels by keeping consumers happy and diminishing the power of Apple, which now owns 70 percent of the download market. Because more compatibility means more competition, labels will reward Microsoft and Apple for opening up their stores to others' devices, as RealNetworks did.

• Microsoft will copy RealNetworks' maneuver. Microsoft's future with media companies and device makers depends heavily on making Windows Media a standard. With Apple's overwhelming market share advantage for iPods, Microsoft will engineer its own iPod support to shore up the position of the Windows Media format and player.

• Apple will be backed into a corner. Like the Sony with its Betamax, Apple has an early advantage--but has to provide all its own innovation with portable players, formats, desktop media players and the online store. Meanwhile, a whole ecosystem of devices (RCA, Samsung, Rio) and stores (Napster, MusicMatch, MSN) is growing up around Windows Media. Monday's RealNetworks announcement could wean some iPod consumers away from the iTunes music store. As Apple's 70 percent market share in portable devices and downloads erodes, the iPod maker could be forced to license its format or once again see a market it created swarmed by Microsoft-compatible hardware and software.

• Sony should give up on its proprietary format. The company's Connect music service and Network Walkman portable player are proprietary and incompatible with the rest of the industry, but they lack the commanding market share Apple has--and RealNetworks' Harmony didn't even both to support Sony's format. Rather than concentrate on its own format, Sony should build Windows-compatible stores and devices.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.