March 19, 2004

music download

Expect A Shakeout as Big Merchants Crowd Online-Music Market

By Clint Swett, The Sacramento Bee, Calif.

Jan. 18--Last spring, when Apple Computer introduced its iTunes Music Store, the company had the nascent field of legal music downloading mostly to itself.

By mid-2004 there likely will be nearly a dozen companies jockeying for the same customers.

Recorded music is "a $30 billion business worldwide, and $30 billion is a lot of money," said Phil Leigh, an analyst with Tampa-based Inside Digital Media, in explaining the rush to set up online music stores.

And it hasn't hurt that Apple proved there is a market by selling more than 30 million songs since it kicked off its online service last April.

An online store is essentially a Web site at which consumers can browse through hundreds of thousands of song titles and then download individual selections to their computers, typically for 99 cents each. The digital tunes can be played on the computer, transferred to portable music players and burned onto CDs.

In recent weeks, Wal-Mart and RealNetworks have launched their music downloading services while Sony earlier this month unveiled similar plans. They join a revitalized Napster, as well as Rhapsody, MusicMatch, EMusic and BuyMusic.

Yahoo!, Amazon and MTV are also considering music download services. And lurking in the background is industry behemoth Microsoft, which has acknowledged plans to launch a service later this year but has provided few other details.

PC companies are getting into the game, too. Dell, for instance, has aligned itself with the MusicMatch download service. And in a surprise announcement last week, HP said it would sell Apple's popular iPod music players on its Web site and brand them with HP's name beginning this summer. In addition, it said it would load all its consumer PCs with iTunes software, effectively steering consumers to Apple's music site.

A variety of factors are contributing to the rush toward online music distribution. Prodded by flagging sales and a surge in illegal downloading, the music industry has become much less restrictive in licensing its tunes to legal download services.

High-speed Internet connections have also become much more common, making downloading faster and more convenient.

Consumers, particularly younger music buyers, are now more comfortable with the notion of buying things from music to books to cars over the Internet.

"I think we're witnessing a real gold rush, and there are a lot of streambeds where companies can stake a claim," Leigh said.

But like the Gold Rush of 1849, there will be plenty of big losers as well as winners.

At least for now, the online music business runs on terrifyingly thin profit margins, with the download sites making only a few cents on the songs they sell for 99 cents each, analysts say.

That won't go far in offsetting the expense of setting up the online music stores, said Leigh, at least in the short term.

He sees the music situation as similar to Amazon.com's years of bleeding red ink while it established itself as the dominant online book seller.

Experts say it's unclear how many online music sites the public will support.

"The market will let us know how many will work," said Mike McGuire, who follows the online music business for Gartner G2. "But will there be a shake-out? You bet there will."

There's little to differentiate most of the online sites, at least in the titles they have to offer. Most of the major music labels offer the same licensing deals to all the online services, which generally boast about 400,000 to 500,000 titles.

A clean interface, good search capabilities and software that can make recommendations based on your previous music purchases all are essential, analysts said.

But the real money will likely be made from selling other products associated with music downloads. Apple, for instance, shipped 733,000 iPods in its most recent quarter, generating $256 million in revenue.

The deal with Hewlett-Packard could further increase iPod sales and accompanying profit margins as increased manufacturing volume contributes to lower costs, said Gartner's McGuire.

For its part, Sony, whose Walkman pioneered portable music players, said it will tightly integrate its devices with its download service, which has been dubbed Connect.

Some of its newest players will allow users to electronically mark songs or artists that they like, said Jay Samit, general manager of Connect. When the unit is plugged into the computer it will send that information to the Connect site, which will then make further recommendations based on your current tastes, he said.

Samit said Sony also has struck a deal with United Airlines to allow customers to redeem their airline miles for music.

However, he squelched speculation that Connect will have special access to Sony's extensive music library. "It will be a level playing field," Samit said.

Napster, the godfather of music downloading, has a deal with Target in which its software and prepaid download cards will be sold in the giant retailer's stores in an effort to broaden the market beyond traditional computer users.

Even though it's too early to tell who the download winners will be, having a legal alternative may help stem the tide of illegally swapping copyrighted music.

According to a recent telephone survey by the Pew Internet and American Life Project, the number of illegal music downloaders in the United States fell from 35 million last spring to about 18 million in late November and early December.

But other measurements say illegal file sharing is still going strong. BigChampagne, a Southern California company that monitors network traffic, said activity at some of the biggest file sharing sites was greater this past December than a year earlier.

Eric Garland, founder and chief executive of BigChampagne, points out that Apple, which has an estimated 70 percent of the legal market, hopes to sell 100 million songs in its first year. But illegal file sharers swap 10 times that number of tunes every month.

Still, Mitch Bainwol, chief executive officer of the Recording Industry Association of America, said progress is being made.

He points to consumer education, aggressive legal action and the availability of legal alternatives as factors that could help thwart music piracy.

"We're living through an important juncture in music history," he said. "Six months ago, people didn't know they could download music legally. Now the whole terms of the debate have changed."

Posted by Craig at March 19, 2004 07:02 PM