July 28, 2003 12:30 PM PDT

Music services jump on iTunes bandwagon

In a rush to market that's reminiscent of the dot-com bubble's headiest days, a stampede of companies is following Apple Computer pell-mell into the online music sales business.

Napster's new owner, Roxio, is scheduled to launch a legal version of the service by Christmas. Musicmatch said Monday that it will soon sell songs through its jukebox application. RealNetworks, America Online, Amazon.com and potentially even Microsoft are planning to sell digital downloads.

For consumers torn for years between downloading music illegally through file-swapping services or signing up for complicated monthly subscription services, the impending flood of available music may be little short of overwhelming. And having hundreds of thousands of songs just a mouse-click away from listeners could dramatically change the distribution and consumption of music, and potentially even alter recording practices, music industry insiders say.

But even before most of the new services launch, analysts are saying the online market is looking a little too crowded for comfort.

"In 10 years, the market might be able to support this many (stores)," Yankee Group analyst Ryan Jones said. "Right now, there are more than can really survive over the next few years."

The near-daily announcements of new music services that have followed the April launch of Apple Computer's iTunes music store are a sign that the logjam of music label licensing restrictions has finally burst, creating what some analysts are calling a genuinely new stage for online music.

Still, the new services are experimental at this point, with few having actually opened their doors yet and most operating on still-unconfirmed assumptions about consumers' likely online music-buying habits. And projections for the market aren't entirely rosy.

According to new estimates from Jupiter Research, spending on online music will total less than $1 billion in 2003. The analyst firm downgraded earlier projections but said spending would rise to $3.3 billion, or about 26 percent of all U.S. music spending, by 2008.
An online cacophony

The PC music market is looking increasingly crowded.

Napster (Roxio): Will offer a la carte downloads and a subscription service. Expected to launch by Christmas.

Musicmatch: Expected to offer a la carte downloads and a subscription radio service. Will launch this fall.

AOL: Offers a subscription service and plans to offer a la carte downloads. Details not yet available.

Amazon.com: Expected to offer a digital download store.

Microsoft: Has expressed interest in adding a digital download service to Windows Media Player.

Listen.com (RealNetworks): Offers a subscription service. Has said it will soon add a la carte downloads.

BuyMusic: Offers digital downloads starting at 79 cents.

Echo: A digital music venture that plans eventually to offer downloads and subscription services through traditional music retailers.

iTunes (Apple Computer): Offers Macintosh-only downloads. Expected to offer a version for the PC market late this year or early in 2004.

The current stampede was largely prompted by the release and the seeming success of Apple's iTunes service. The combination of an elegant interface, simple 99-cent-per-song pricing and unprecedented cooperation from music labels in providing songs without obvious restrictions on their use allowed iTunes to stand head and shoulders above anything that had previously hit the market.

MP3 jukebox company Musicmatch, which said Monday that it would launch its own digital download service though its software by the end of the year, may be the company following most closely in Apple's footsteps. Musicmatch said it would use the jukebox music player as the gateway into the music store--as Apple has--and, at least for now, the company is avoiding the kind of all-you-can-eat monthly subscription plans that Listen.com, America Online and Roxio's new Napster will offer.

"We think generally people want to own music," Musicmatch senior vice president Bob Ohlweiler said Monday. "An a la carte service has a lot more to offer to the masses, and the potential for a much higher adoption rate."

Windows of opportunity?
While praising Apple's service, analysts caution that its success won't necessarily transfer completely to the Windows environment.

Many, if not most, of the planned PC services are converging on Microsoft's Windows Media technology, both for encoding the music and wrapping songs in digital rights management protections. Musicmatch's Ohlweiler said Microsoft's technology was flexible enough, and perhaps most importantly, made the big record labels comfortable enough to make it the best available option.

A few wild cards remain, however. Most notably, Apple prominently highlighted its own use of the AAC codec, a standards-based technology, when it launched its own iTunes service. It has not yet released technical details for its Windows-based service, but many expect it to try to retain the AAC foundation.

BuyMusic, launched by Buy.com founder Scott Blum last week, is already revealing some of the risks associated with the PC market.

The service offers an array of nearly 300,000 songs for sale at varying prices starting at 79 cents per tune. But the company did not manage to negotiate the same uniform licenses that Apple received, which means, for example, that some songs may be able to be burned to CDs multiple times while others may not, or that songs may vary in terms of how many MP3 players on which they can be stored.

"Having different rules for different songs has the possibility of confusing and frustrating consumers," IDC analyst Susan Kevorkian said. "Consumers won't necessarily understand the politics behind that, nor should they."

The sheer numbers of coming music services could provide an eventual antidote to the confusion, however. There will be many different outlets to try, and the companies that can provide a service and business model that resonates with subscribers will likely be the ones to survive.

Analysts predict that the companies will quickly try to differentiate themselves on elements other than price, since everyone is locked into a similar 79 cent to 99 cent price tag by their agreements with the record labels. They also need to find crafty ways to deal with the extremely thin margins possible on single sales. Some analysts say the next step will likely see music companies advertising the ability to integrate more tightly with MP3 players or home theater systems.

 

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