September 23, 2004 3:41 PM PDT

PassAlong jump-starts eBay music effort

Online auction giant eBay is entering the music download business with a service that will market content from major record labels.

The digital music service, which is powered by start-up PassAlong Networks, officially debuted Thursday. PassAlong, which also launched Thursday, is the first company to peddle songs from major labels on eBay's nascent music storefront.

PassAlong has the rights to sell downloads of the entire music catalogs of top-tier recording companies EMI Group, Sony, BMG, Universal Music Group and Warner Music Group. The company, based in Franklin, Tenn., will offer the music files through both its own Web site and a newly created section on eBay.

As of late Thursday, PassAlong had only posted an auction for a promotion offering a phone conversation with singer Avril Lavigne. But the company's chief executive, Dave Jaworski, said that some 200,000 songs will be made available through both sites by the end of the week. Jaworski said PassAlong has plans to offer more than 500,000 tracks for sale.

"The eBay community has come to expect a reliable, safe environment for doing business, and we're hoping to offer the same kind of quality for music downloads," Jaworski said. "This effort with eBay will offer consumers an opposite of unprotected and illegal peer-to-peer file-sharing networks."

PassAlong differs from many other music download sites in that it allows its paying customers to share music files with others and offers rewards, such as discounts on further downloads, to those who successfully encourage additional people to pay for its content.

The PassAlong debut on eBay marks the first significant step in bringing the auctioneer's emerging digital-music plans to life. eBay's current beta test of its online download marketplace has remained largely unused since its launch in mid-July, causing some industry watchers to wonder where the project stood.

Up until now, eBay's Digital Downloads section has only offered auctions hosted by Warner Bros. Records for cell phone ring tones based on music by the band Green Day, and only one independent musician has been selling his work on that part of the site.

eBay is allowing a select group of pre-approved companies and musicians to sell downloads as part of its initial entry into the online-music space.

"This is part of our ongoing pilot program to test whether the eBay community sees (eBay) as a viable marketplace for the buying and selling of digital music downloads," said Hani Durzy, an eBay spokesman.

The PassAlong announcement comes after weeks of speculation that eBay was planning to join the red-hot digital music download space. The company, based in San Jose, Calif., is hoping to compete with established players such as Apple Computer's iTunes, which has already sold more than 125 million songs, and Microsoft, which launched a test version of its MSN Music service earlier this month. A number of other companies have rushed to get their own music download services on the market, including Napster, Sony, RealNetworks and Yahoo.

Digital music profits muted
eBay's cautious approach to the download market speaks volumes about digital music's profit potential. Despite selling such a staggering number of downloads, typically for 99 cents per song, Apple has indicated that iTunes is not a major source of revenue. For companies like Sony and Apple, the idea is to spur sales of hardware, such as Apple's iPod device, that are used to listen to digital content.

Microsoft and RealNetworks sell media software, but the ability for retailers to make money by selling digital music singles alone--each of which may have only a few pennies of profit--remains uncertain.

According to Josh Bernoff, an analyst at Cambridge, Mass.-based Forrester Research, eBay faces plenty of competition, but its community of more than 150 million users worldwide represents a significant opportunity. Bernoff said that while it seems as if every major IT company has expressed some interest in digital music, eBay's situation is unique.

"eBay's biggest asset remains its community of users," Bernoff said. "Attracting people is the first step, and they've already got a sizable audience to work with."

Bernoff believes that eBay can become a major download center if its policies allow sellers to make enough money off the transactions to make their businesses feasible. The analyst said that many of the other companies hoping to join the music download market may face more significant challenges.

"The atmosphere is similar to the early e-commerce days, with everyone trying to grab a piece of the action," Bernoff said. "When the dust settles, there will likely be three or four successful services, not a dozen. eBay is in a position where they don't want to be left out, but it will still be hard to profit immensely off of 99-cent deals."

 

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