Verizon Wireless has upped the ante in its efforts to take on Apple's iTunes store in the digital music market by offering DRM-free music for all purchased music plus a new subscription service. But will it be enough to make a dent in Apple's dominance?
On Monday, Verizon Wireless will announce the revamped V Cast music store, which will be loaded with digital music that is free of the pesky digital rights management encryption on all songs that are purchased through the store. Verizon is joining Amazon as the only other digital music distributor that will be selling DRM-free music from all four of the major record labels, including, Sony BMG, Universal Music Group, Warner Music Group, and The EMI Group.
The company is also offering its first ever music subscription service courtesy of its relationship with Real Networks' Rhapsody America service. Verizon announced it was partnering with Rhapsody last year. And through this partnership, the company has redesigned its music store and the V Cast user interface.
The new service clearly puts Verizon Wireless in a new category when it comes to digital music. Verizon cell phone subscribers as well as nonsubscribers can download the DRM-free music onto a PC and sync it to any MP3-enabled device for $0.99 a song. Songs can be purchased over Verizon's cell phone network onto a Verizon phone for $1.99 a pop. And the new V Cast service also allows Rhapsody subscribers to sync their phones to the subscription service, much the same way AT&T subscribers can access the Napster subscription service.
But even though it has potential to become a major player, it's still unlikely that the cell phone company's moves will have much impact on market leader Apple. Instead, experts believe that Verizon is much more likely to help grow an already underperforming market.
"The issue isn't whether Verizon can take down iTunes," said Russ Crupnick, a senior analyst at the NPD Group. "But rather, can it help grow the market? And I think the answer to that is yes. Verizon is very well-positioned for that."
The music industry is in dire straits. Sales of CDs have been plummeting over recent years, and the industry hasn't been able to make up for the losses through digital distribution. Apple is by far the leader in digital downloads, hitting the 5 billionth song download mark from its iTunes music store just a couple of weeks ago. According to Crupnick, over three-fourths of the full music tracks downloaded come from the iTunes store. Amazon is a distant second, with other players such as Wal-Mart trailing even further behind.
So far, freeing music downloads from DRM protection hasn't done much to move the needle. Amazon and Wal-Mart have been offering DRM-free music for almost a year, and they still lag behind Apple. The reason for this could simply be that Apple is so far ahead in terms of market share that few people have reason to see DRM protection as a problem.
"When you have 80 percent market share on Apple devices," Crupnick said, "there isn't much demand from people to get unprotected music. They don't seem to encounter any issues with it."
Ed Ruth, director of digital music for Verizon, said that the company is simply trying to offer customers choices.
"Of course we recognize that Apple has done a great job," he said. "They have helped tell the digital music story quite well, and they've tilted the ecosystem in one direction. But in some ways they have trapped people into one experience. And that's the problem we're trying to solve."
Meanwhile, Verizon could also have an uphill struggle in getting people to use the Rhapsody subscription service, which costs about $15 a month for unlimited access to millions of songs. In the online world, only a small niche of music aficionados use services like Rhapsody and Napster. And so far, the model hasn't proven to be much more successful in the mobile world. AT&T has been offering the Napster music service, and even though the company hasn't published figures on how many customers are using the service, analysts say it hasn't been a runaway success.
But some analysts think that a service that does a good job of integrating Verizon's V Cast with Rhapsody could help attract new users to the subscription model.
"If they can make the experience of Rhapsody on a handset complimentary to what they are already doing with V Cast, I think it will make Verizon a stronger player by attracting new music subscribers," said Susan Kevorkian, an analyst at IDC.
While Verizon may never be able to beat Apple in the online music game, there's reason to believe that the company could beat out its fellow cell phone carriers and other music downloading services for market share. And in such a nascent market, Verizon still has an opportunity to make a significant amount of money from its music store and help move the carrier away from simply being a phone company.
Verizon claims that record labels have told it that in terms of revenue, it is already second to Apple when it comes to the money that is made from full track downloads. And in a recent survey of Internet users conducted by NPD Group, Crupnick said that over half of the respondents had heard of the V Cast music service. This was higher than awareness for music services from other cell phone companies such as Sprint Nextel or AT&T. But it was also higher than some well-established music brands, such as Microsoft's Zune music store, Rhapsody, and Napster. Still, only about 7 percent of the respondents said they had ever used the V Cast music service to download songs.
But Crupnick believes this consumer awareness could someday translate into growth for Verizon's V Cast service. Verizon also has other attributes that some of these other music distribution channels don't have. In addition to selling full track songs, Verizon is also able to help the record labels monetize the same songs in multiple ways by selling ringtones, ring-back tones, and wall papers of the artists. The company has even begun working to help produce some albums using a mobile recording studio.
What's more, Verizon has access to a wide variety of music playing devices, something that Amazon and Wal-Mart don't readily offer themselves. And it already has an established billing relationship with most of the customers that will likely use its site to download music. All of this bodes well for Verizon. But is it enough to really challenge Apple's dominance?
The answer is probably no. But it could be enough to make it a strong alternative. At the end of the day, Verizon's Ruth said that it's all about forming good relationships with the music industry and providing a great service to customers.
"Our approach is to be as good a partner to the music industry as we can be, " he said. "And we always keep the customer experience and expectations in mind when designing and delivering the service. I think we've done that so far and as a result have earned the trust of our customers."
UPDATE: To include Starbucks' response.
Turns out what people want from Starbucks is the caffeine jolt and maybe a morning bun. The country's largest coffee chain is giving up on much of its music offering, including iTunes gift cards.
According to Silicon Alley Insider, Starbucks is planning to carry only four CD titles at a time in it's stores by September.
"We're shifting how music is merchandised in the store," said Bridget Baker, a Starbucks spokeswoman. "There's going to be a concentrated selection as we refocus on our core business."
Seattle-based Starbucks once fancied itself as an entertainment center where people sipped coffee and grooved to the latest tunes. The company's dreams of branching into music has had a troubled past.
Remember the Hear Music media bars, the in-store CD burning service Starbucks began offering in 2004? That didn't go anywhere either.
Starbucks isn't giving up on music completely. The chain will continue to offer the free Wi-Fi access to Apple's online music store, Silicon Alley reported.
In March, The New York Times reported that each Starbucks store was selling only two CDs a day on average. Starbucks said its music unit was selling more than 4 million CDs a year.
Apple is in talks with the largest record companies as it attempts to boost the iPhone's offering of ringtones and other musical content, according to a report in The New York Times.
Citing several unnamed music industry executives, the Times said that negotiations are "very active" and a final deal has not been set.
A final deal may come after June 9, when Apple CEO Steve Jobs speaks at the company's developer conference, the paper reported. That is when some expect Apple to announce the coming of the next-generation iPhone.
In addition to beefing up ringtones, Apple is also looking for rights to deliver songs from iTunes to iPhones over the cell phone broadband network, according to the Times. The labels are asking for more money for this kind of delivery, the paper reported.
Here's what the music labels are looking at: Apple is not only the country's biggest music retailer but is also becoming a force in mobile phones. If the record companies ask too much money for ringtones and other features, they risk losing sales to the growing number of iPhone owners.
Ringtones are a sweet deal for the labels because they typically are shorter versions of songs but retail for the same price--sometimes higher--of a full song.
But Apple is up against a determined group. The big music companies have signed a score of deals with other music retailers and cell phone companies. It's often written that the music industry doesn't want to be beholden to any one distributor. The top labels want greater flexibility with setting prices on iTunes.
If a deal can't be reached, Nokia and other cell phone makers could gain an important advantage over the iPhone.
Apple drew a lot of attention when it announced that it will offer movie downloads the same day they come out on DVD, but the deal won't mean a windfall for Apple--at least initially.
The reason for that is Apple will lose money on every sale, a source said.
Apple announced on Thursday that it had reached an agreement with a group of film studios, including the six largest. Apple said that starting this week, iTunes customers will be able to purchase newly released movies for $14.99, while most catalog titles are $9.99.
The Wall Street Journal reported that Apple is paying the studios nearly $16 for each sale, but a source close to the negotiations told CNET News.com that Apple is paying closer to $15.50 than it is $16.
It's not uncommon for retailers to sell a new product at a loss. The question is whether Apple will eventually boost the prices or if the company can convince the studios to take less.
The only way a dialogue like that would even begin is if Hollywood sees boffo sales out of Apple.
New movie releases from a number of major and independent studios will be available on iTunes the same day they're offered on DVD, Apple announced Thursday.
Starting this week, iTunes customers will be able to purchase movies just now being released on DVD, including American Gangster and The Diving Bell and the Butterfly. New releases are priced at $14.99, while most catalog titles are $9.99.
The studios making available the new movie releases and catalog titles are 20th Century Fox, Walt Disney Studios, Warner Bros., Paramount Pictures, Universal Studios Home Entertainment, Sony Pictures Entertainment, Lionsgate, Image Entertainment, and First Look Studios.
Other titles now on sale at the iTunes Store include Juno, Cloverfield, and There Will Be Blood.
The iTunes Store offers more than 1,500 films, including 200 in high-definition format, Apple said.
In January, Apple announced a deal with top film studios for an iTunes Movie Rentals service that brings first-run movies to iTunes a month after their release on DVD. iTunes movie rentals cost $3.99 for new releases and $2.99 for catalog titles.
SAN FRANCISCO--NBC Universal would like to have its TV shows distributed once again through Apple's iTunes service, a top executive said Wednesday, but he called for antipiracy measures to help protect his business' revenue.
George Kliavkoff, chief digital officer at NBC Universal, didn't specifically mention Apple by name in his request, but it was clear he had the iPod maker in mind when it came to combating people's consumption of pirated content.
George Kliavkoff, chief digital officer at NBC Universal
(Credit: Stephen Shankland/CNET Networks)"If you look at studies about MP3 players, especially leading MP3 players and what portion of that content is pirated, and think about how that content gets onto that device, it has to go through a gatekeeping piece of software, which would be a convenient place to put some antipiracy measures," Kliavkoff said in an onstage interview at the Ad:Tech conference here. "One of the big issues for NBC is piracy. We are financially harmed every day by piracy. It results in us not being able to invest as much money in the next generation of film and TV products."
Apple's iTunes service has become the largest music retailer in the United States, but relations between Apple and NBC Universal are strained. In 2007, NBC Universal pulled its TV content from iTunes when the two companies disagreed about pricing. Kliavkoff made it clear that he'd like the conduit back, though.
"We'd love to be on iTunes. It has a great customer experience. We'd love to figure out a way to distribute our content on iTunes," he said, but wouldn't comment on any negotiations. "We have film distribution with iTunes so yes, we do talk to Apple," he said.
Price appears still to be a sticking point. NBC Universal sets a wholesale price for content it offers to distributors, and then distributors are free to set the retail price.
"They can mark up the price and make a profit or use it as a loss leader to get people in the door," Kliavkoff said. "It's really difficult for us to work with any distribution partner who says 'Here's the wholesale price and the retail price,' especially when the price doesn't reflect the full value of the product."
"The music industry guys would have something to say about how the pricing has affected their product over the last few years," he added.
The Apple-NBC Universal spat has been a game of brinksmanship over which company needs the other more. Analysts at Forrester Research think Apple needs the content more than NBC needs the distribution.
NBC Universal, through a 50-50 partnership with NBC and News Corp., has its own mechanism to view entertainment TV shows on the Web: Hulu. However, the site doesn't offer downloads and doesn't support mobile devices, at least today.
Hulu is in part an attempt to combat piracy on Google's YouTube, Kliavkoff said.
"It used to be that at the end of Saturday Night Live, YouTube would have clips up faster. You can fight that all you want, but until you provide a place to go at 1:05 a.m. Eastern time that has the digital short, you won't get anywhere." Now, with Hulu, viewers can get the same content through legitimate channels.
YouTube, he added, is a "fantastic promotional vehicle for some of our product," such as trailers. And it's the "market leader for amateur content." But sites like Hulu will change its position for professionally produced video, he predicted.
"I think that balance will shift a little bit. I think at the end of the day people, more often than now, will want to see professionally produced content," Kliavkoff said.
Apple's iTunes helped digital music go mainstream
(Credit: Apple.com)Some of you out there can pat yourselves on the back. You've been shouting for years on Web sites, message boards, and blogs that the music industry would one day bow to technology.
That day has most certainly arrived.
Take a second to gaze out over the music landscape. Technology reigns supreme. Not only have the four largest record companies begun killing off digital rights management and adopting unprotected MP3s, but this week they sidled up to file sharing like never before. There isn't any question that the labels have raised a white flag after being overwhelmed by the digital age and the desire of fans to share songs.
Consider that this week the EMI Group hired Douglas Merrill, Google's former Chief of Information, to run the label's digital unit. He is a self-described geek and former file sharer. He has no previous music-biz experience. "There's a set of data that shows that file sharing is actually good for artists," Merrill told me on Wednesday during a phone interview.
A year ago, you would have never heard a music exec utter such a thing.
On Thursday, MySpace Music was announced. This is the music service that the big record companies started with News Corp. to allow fans to buy downloads, listen to streaming music, and yes, by God, share music. MySpace users won't be sharing files, but they will be passing music to one another a la social networking.
And which retailer is sovereign over music sales? I'll give you a hint. It's not Tower Records or Sam Goody (both defunct). It's not Target, Amazon, or Wal-Mart. Not anymore.
The No. 1 music retailer in the land is Apple's iTunes, an online store and dealer of digital music. How do you like them apples?
But this isn't the time to gloat. The digital music revolution is in its infancy. Nobody knows what works yet.
In our an interview, Merrill said that a winning business model hasn't been found, and that's what he's after.
"I think there are going to be a lot of different models," said Merrill, who starts his job as president of EMI's digital arm on April 28. "You can imagine supporting music through relevant targeted ads, the Google model. There are a dozen other things... We should try them all. We should see what the data says and whatever it says, we should follow the data, and follow our users, and let them help guide us. We should engage in a broad conversation about art."
How this plays out is anybody's guess. In the near term, we're likely to see more job cuts and shrinking revenue in the sector as we transition into what Forrester Research analyst James McQuivey calls Music 2.0. The reality is that recorded music will probably never produce the kind of revenue it once did. Digital technology has degraded the value.
There's nothing that says the labels will be part of the final equation, but I wouldn't bet against them--especially if they continue to embrace new technologies and business models. They've got lots of money. They still know how to find and create stars.
But the record companies are going to have to morph into smaller entities that represent fewer acts and then oversee their total output: music, video, concerts, and merchandise. This is the model that Live Nation is using to attract major artists, including Madonna, U2, and Jay-Z.
I say long live Music 2.0.
Imagine digital music without Apple as the marquee act.
That's what the music labels want. For years, they have wished for a legitimate challenger to wrest away some of the bargaining power Apple has wielded as the No. 1 online music seller. So, here we go again: it's another iTunes killer.
On Thursday, MySpace executives unwrapped MySpace Music. Backed by the four largest record companies and MySpace parent company News Corp., the music service will offer much of what iTunes does and more, according to MySpace's managers. But haven't we heard this before?
Urge, Sony's Connect, and SpiralFrog are only a few of the services once predicted to unseat iTunes. Of this group, only the troubled SpiralFrog continues to limp along. The other two no longer exist.
MySpace is up against music retail's supreme power in Apple's iTunes. The new service must compete with not only one of the most successful consumer-electronics makers of all time, it must do battle with arguably one of world's greatest marketers and retailers in Apple CEO Steve Jobs. Apple has dominated Internet music sales the past six years and now iTunes can call itself the country's largest music retailer--online or off--after besting Wal-Mart in sales during the first two months of 2008.
Apple's iTunes has had years to establish a large and loyal following and to develop systems that make shopping at the site simple and easy. And you can't underestimate the power of having iPod owners already plugged into iTunes.
Besides music, Apple has forged relationships with movie studios and TV networks that enable iPod owners to watch feature films and TV shows on their devices. But even though Apple has a head start with iTunes, the service will have to keep up with the industry's rapid changes.
"MySpace Music is not a serious threat for at least two or three years," said James McQuivey, an analyst with Forrester Research. "Apple's iTunes succeeds because of its connection to an amazingly popular device. As long as the iPod is central to their music strategy, they will continue to be a force. But the question is whether iTunes can adapt to Music 2.0."
The next stage in the music industry's evolution will be an all encompassing model that melds social networking, e-commerce, and music discovery.
MySpace Music is unlike any iTunes challenger that has come before. An audience of 110 million people from all over the world visit MySpace every month. About 30 million listen to music on the site, and more than 5 million music acts rely on the site for promotion.
So influential has MySpace become in the music world that last year when EMI was preparing budget cuts, it considered a plan to reduce expenses for discovering new artists by getting talent scouts to spend less time in music clubs and more on MySpace.
Nothing has done more to expose Apple to competition than the death of digital rights management. Although Jobs called for the end of DRM, there's no question that it provided iTunes with protection from competitors. With the major record companies adopting unprotected MP3s, iPod owners are free to buy songs from any music store selling DRM-free songs. Music fans are no longer locked into iTunes.
"Apple's advantage lies in the Apple iPod connecting to iTunes," said Susan Kevorkian, an analyst with research firm IDC. "But that advantage is being dissolved by MP3s that are compatible with more and more online music services. And the social networks have the opportunity to offer new dimensions to the online-buying experience. Not only can they offer information on specific bands, but they also have the ability to easily connect users to each other and share taste-making information."
MySpace's intent is to create a total immersive music experience, the digital equivalent of walking into a large record store, one that features listening posts, CDs, DVDs, vinyl albums, and in-store concerts, according to McQuivey.
"What MySpace Music does is establish a new level of expectation about what music could be in people's lives," McQuivey said. "Apple might find itself following for the first time."
But here is what MySpace should do if it seriously intends to challenge iTunes.
MySpace has to build a site that's as easy to navigate and buy music from as iTunes. That's not an easy feat. Plenty of others have failed at this, and one of the main criticisms of MySpace is that the site is cluttered and difficult to move around on.
It also needs to undercut Apple on price. That's what Amazon did. The Web's biggest store offers most songs for 79 cents, while Apple sells them for 99 cents. The company has yet to report how the strategy has worked, but nothing speaks to consumers like a bargain.
Apple offers movies and TV shows, so MySpace should cut similar deals with Hollywood. Why stop at music? If you're going to compete with iTunes, you must have at minimum everything Apple offers. That also means signing EMI, the only label among the four majors not to join the venture.
Even Apple fans should want MySpace to challenge Apple. Jobs and company have always been at their sharpest when pushed.
Rock on, MySpace.
Tech blog Ars Technica says they've got their hands on an internal Apple memo that shows iTunes has topped Wal-Mart Stores in total global music sales.
The data in the memo cites a report from the month of January conducted by The NPD Group, a market research firm. NPD's numbers show the iTunes Store leading overall music sales for the first month of 2008 with a 19-percent share, followed by Wal-Mart with 15 percent, Best Buy with 13 percent, and Amazon with 6 percent.
The NPD Group, which reserves certain data for paying customers--like Apple, Wal-Mart, and others--and more general results for publication in the press, isn't taking ownership, but it's not exactly denying the numbers in the report either. NPD spokesman Lee Graham told CNET News.com he "can't comment on or confirm the information because all of that was based on a leaked memo from Apple."
Wal-Mart has long been the leader in global music sales, but Apple opening up a lead isn't a huge a surprise, as it's been on a roll lately. Most recently, the iTunes Store passed Best Buy to take up the second-place spot, according to an NPD report released in February.
Apple is in for a fierce legal fight should it ever release a device that offers all-you-can-eat music, according to David Pakman, CEO of rival digital music service eMusic.
"It smells like classic Sherman Antitrust Act to me," Pakman said. "I only know what I've read but the plan sounds very similar to the tying practices Microsoft used with Windows/Explorer. And Microsoft is still paying the penalties for that one."
The Financial Times reported Tuesday that Apple is in talks with the four largest record labels about offering a device with access to the entire iTunes music library. A source close to the negotiations confirmed the report in an interview with CNET News.com and said the offering would be free initially but device owners would later be charged subscription fees.
The talks are preliminary and no agreements have been reached, the source said. That hasn't stopped some of Apple's competitors and antitrust lawyers from sounding alarms.
Pakman says Apple is following Microsoft's lead. In 1998 the U.S. Department of Justice filed a lawsuit accusing Microsoft of monopolistic practices by bundling Internet Explorer with its Windows operating system. The case was settled in 2001. In that case Microsoft had monopolistic position in operating systems with Windows, the government charged. The company achieved dominance in browsers by forcing Windows buyers to use Microsoft Explorer.
The parallel is that Apple is forcing people who buy this device with preloaded music to buy its music, Pakman argues.
An Apple spokeswoman said the company doesn't comment on rumor or speculation.
Critics say that Apple, which sells 70 percent of all digital music devices, could use its overwhelming market share to wall out competitors. No other music services--download or subscription--could sell songs to such a device. Music listeners wouldn't need to get their music anywhere else. Competition among digital music retailers would suffer, said Pakman.
Such a plan "would produce a long and drawn out fight in both the U.S. and European courts," Pakman said.
What's the difference between a device that bundles music and the relationship between iTunes and iPod? Weren't they tied together?
The answer is yes and they have been challenged in U.S. and European courts. A year ago, two separate lawsuits, which have now been consolidated, accused Apple of unfair competition, maintenance of a monopoly power and "unlawful tying." That case and a similar one, Black vs. Apple, are pending, according to documents Apple filed with the Securities and Exchange Commission.
In France, a consumer group has alleged that Apple has violated that country's consumer laws by failing to mention that the iPod is "allegedly not compatible with music from online music services other than the iTunes store" records show.
Maxwell Blecher, an antitrust expert with the Los Angeles firm of Blecher & Collins, agreed that Apple could face legal challenges for bundling if other music vendors are indeed prevented from distributing songs to such a gadget. "Apple is going to argue that they compete with lots of other similar devices," Blecher said. "You have to look at whether there are exclusionary aspects or conduct. In that debate lays the outcome of any lawsuit."
Universal Music Group has already signed a deal with Nokia to enable buyers of some of its devices to gain access to all of Universal Music's library. The music industry source said that UMG is in talks with several other handheld manufacturers as well. But no handheld maker has struck a deal with all four of the top music companies. Apple could be the first.
But just because smaller players in the market may have similar deals may not be enough to prevent Apple's deal from being challenged, said Blecher.
"When Apple came out with the iPod, only Apple could deliver music to it," Blecher said. "They accused Apple of exclusion. When they did the iPhone, it was impossible to shift to other carriers. They said that was exclusionary...any time you have high market share and restrict competition in any way, you're going to raise antitrust concerns."
