August 3, 2004 4:00 AM PDT

eBay's music foray lacks volume

Just hours after eBay announced its new music download site, a handful of songs popped up for sale--a sure sign of intense interest in the company's plans to take on iTunes and others.

It was the wrong sign.

The files had been posted by people who were not authorized to sell music in the six-month test and were quickly removed. The site has been empty ever since.

News.context

What's new:
eBay's tentative entrance into the music download business speaks volumes about the industry.

Bottom line:
Analysts say the next year or so is the right time for retailers to try new ideas, but their ability to make money by selling digital music singles remains uncertain.

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eBay says it's still waiting for one of its pre-approved music sellers to post a listing and that it has no more control over this than it does over the pacing of used car or Star Trek memorabilia auctions. But the nearly three-week lag in content underscores the tentativeness of the company's entry into the digital music arena.

"We may look at the results of this and say, 'Alright, this didn't work, the community didn't like that,'" eBay spokesman Hani Durzy said. "We have no idea, honestly."

Count eBay as a definite "maybe" in the rush to digital music sales, placing the auction giant alongside Net retail powerhouse Amazon.com as one of the slowest in the race to forge new digital download businesses.

Despite the success of Apple Computer's iTunes Music Store and interest from giants such as Sony and Microsoft, such reticence from the Net's two biggest retailers speaks volumes about digital music's profit potential. Sony and Apple sell hardware, and Microsoft sells software, but the ability for retailers to make money by selling digital music singles--each of which may have only a few pennies of profit--remains uncertain.

Amazon itself has remained staunchly mum on its future plans for digital music. The company does offer a handful of free downloads from major artists on its site and allows independent musicians to upload their own tracks for free distribution. But it does not sell digital singles on its site. Some analysts have speculated that the company is loath to cannibalize its physical CD sales, and so is avoiding the digital business for now.

Amazon did not return calls for comment on its music plans, but a handful of job postings on its site hint that more could be in the works. While providing no details, one job posting seeks a management candidate for a position "specifically focused on the issues related to digital music."

Analysts say that the next year or so, before mainstream consumers develop strong digital music purchasing habits, is the right time for retailers to try out new ideas.

"If you're somebody like eBay or Amazon, now is the time to do your experimentation," said Mike McGuire, an analyst with the GartnerG2 research firm.

What does eBay bring?
With eBay's shelves still empty, it's not clear exactly what form its digital music sales will take.

eBay's Durzy said the company is not yet tied to any given model, whether auction or fixed-price sale, and is leaving most details up to its independent sellers. The company has said its auctions will largely point to sellers' sites for secure downloads, because it does not engage in distribution itself.

"We're putting this into place to give the community an opportunity to tell us if there is a demand," Durzy said. "eBay is really good at making inefficient markets efficient. (But) we may find that there is no demand or that the transaction hurdles to buying and selling are great."

Finding market inefficiencies with digital music may be harder than it has been with hand-knitted sweaters, however.

Part of the problem is that there is no scarcity of digital music. Most songs that are legal to sell online are available for between 79 cents and 99 cents at stores like WalMart.com and iTunes.

This means that auctioning digital music doesn't make much sense, music executives say.

"You would get to a certain price point and then don't need auction anymore," said Ted Cohen, EMI Music vice president of new media. "If a song goes above 79 cents, people are going to buy it on WalMart. If it goes above 99 cents, they'll go to iTunes. You can't exceed the market value, because it is not a scarce commodity."

Nor is "used" digital music easily resold. Digital songs purchased online are usually wrapped tightly in digital rights management software, which makes it difficult to transfer ownership.

Web developer George Hotelling tested this last year, trying to sell an iTunes song on eBay. The company deleted his auction, saying it violated their policies, but he did ultimately succeed in selling it. However, he had to transfer his entire iTunes account to the buyer in order to transfer rights to the song itself.

In response, an Apple executive at the time said that reselling from its music store was "impractical, though perhaps within someone's rights."

Most expect eBay to create a home for labels or artists to sell their own digital works online--much as Amazon offers CDs from independent artists and labels on its site. Durzy said that at least one label had signed up to participate in eBay's trial.

That could put it more directly in competition with Apple, which is also appealing to independent labels. CNET Music.download.com also distributes independent artists' music, but it does not support sales directly from the site. CNET Networks is the publisher of News.com.

An Apple executive declined to comment specifically on eBay, but said the company is not concerned about Web-based downloads in general. Consumers have shown they like the links between a song store, a software jukebox and a portable player like the iPod, he said.

"Integration between all three is hard to do, and we think that's the killer piece," said Eddy Cue, Apple vice president of applications and Internet services. "In general, our thought is that buying music off a Web site is not a great experience."

 

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