(UPDATE: RealNetworks has filed an 8-K form with the SEC that contains some more details about Rhapsody America. Most notable: MTV is contributing a $230 million note to the deal, and RealNetworks will in exchange be required to spend that amount with MTV on advertising. The joint venture is between RealNetworks and MTV, with Verizon as a distribution partner.)
The 2007 Consumer Electronics Show must've held some awkward moments for Microsoft.
The previous year, the company had trumpeted MTV's Urge music store as the showcase for the Windows Media Player 11 that was due to ship with Vista. Bill Gates had Justin Timberlake on stage to promote the forthcoming service, which would be integrated into the Windows Media Player (as was previously the case with other stores, such as Napster and MSN Music), and would "bring people's emotional connections with music to the forefront of the digital entertainment experience" (said a particularly ebullient press release). At the same show, Microsoft also made a big deal out of Verizon's V Cast service, which was the first to offer both over-the-air and PC-based music downloads using Microsoft's Windows Media Audio technology.
A year later, in 2007, Vista was still not out--the result of a final delay that had the OS missing the 2006 holiday season--so Microsoft was forced to trot out Urge and Windows Media Player 11 yet again as examples of how great digital media would be in Vista. Only this year, there was a new wrinkle: in the interim, Microsoft had announced and launched its own competing music player, software (why "integrate" with the Windows Media Player if you can build your own dedicated app?), and store. None of which were compatible with the vast array of products from long-standing partners, such as MTV and Verizon.
At the time, Microsoft insisted that its PlaysForSure initiative (which identified compatible Windows Media-based players and stores from third parties) was not dead, but would remain on a separate but equal development path from Zune. Apparently the partners didn't believe it. First, Samsung jumped ship, creating its own player-store-software combination. Now MTV and Verizon have teamed up with Microsoft's oldest competitor in the digital music space, RealNetworks. The ink's still drying on the deal, but their goal is to launch a new company, Rhapsody America, that will give users access to a huge library of music from almost anywhere--the "celestial jukebox" that many music fans have been wanting for years.
The alliance makes sense. Rhapsody, which consistently wins praise from reviewers and users, would get a huge marketing boost from both Viacom/MTV (which recently announced plans to spend $500 million expanding its game portfolio) and Verizon, as well as a new distribution channel (inclusion on Verizon phones, sales of over-the-air downloads). MTV gracefully shutters Urge--which never had a chance to get off the ground--without abandoning the online music market altogether, and gets a way to distribute music to mobile phone users. Verizon gets an online subscription service to add to its over-the-air and download-based services.
So now it's Microsoft's move. Will they respond by adding an over-the-air component to Zune? (As SanDisk and Yahoo teamed up to do, and RealNetworks and iRiver plan to do.) An announcement should be coming in the next couple of months if they're going to get anything new out in time the holidays.
[This entry has been revised: I didn't read the MediaNet release carefully enough...they are offering DRM-less MP3s, not WMA files. Apologies to anybody whom I misled. My bad.]
Back in May, EMI--one of the big four record labels--agreed to sell its songs through Apple's iTunes without digital rights management (DRM) protection.
Before this move, iTunes and the iPod were technically linked: if you bought a song from iTunes, you could only play it on an iPod (unless you burned it to CD then re-ripped it into an unprotected format). Offering DRM-less downloads severed this link, allowing users to play downloaded iTunes songs directly on a Zune player (one of the few portable players other than the iPod to support AAC), and making the MP3 conversion process easier. But by and large, the landscape didn't change much. The iPod already has 70 percent+ of the market, so there just isn't much demand for playing iTunes songs on other types of devices.
Today, MediaNet announced that it, too, has licensed more than 1 million DRM-free tracks from EMI. MediaNet, which just changed its name from MusicNet, is the back-end store for most of the second-tier music download stores (iTunes is the only tier-one store, with something like 80 percent market share), including Yahoo Music, MTV Urge (heavily promoted by Microsoft before it launched its own Zune player and store), and Samsung Digital Connect (Samsung's response to Zune).
Equally important, the DRM-less downloads on the MediaNet stores will be in the MP3 format. While AAC (and Windows Media Audio, for that matter) offers a much better quality-to-compression ratio, MP3 is supported by all portable players, all digital media software for all computer platforms, and far more consumer electronics devices than any other compressed digital format. This could actually change the landscape: paid downloads, from one of the major labels, playable on an iPod, from a source other than iTunes. That's new.
The challenge to iTunes' hegemony could accelerate when Amazon launches its MP3-based store later this year. If EMI and the other smaller labels offering DRM-less MP3s begin to see their digital sales rise, then the other big labels might follow suit. And once all tracks are available in DRM-less MP3 format, the only differentiator for the iTunes store is the fact that it's integrated with the iTunes software, which is required to use an iPod (or iPhone). That integration should be enough to keep iTunes in the lead, but now these other stores have a fighting chance to compete on pricing and selection.
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