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Digital Entertainment

New Web Services Put Music in the Cloud

(This story has been updated to include new information about Microsoft's Zune service pricing plans.)

Peter Horowitz used to be a customer that record companies were glad to have stick around. The 64-year-old New Yorker used to buy 15 to 20 CDs a year from (AMZN), indulging his tastes for jazz, classical, and pop music. Not anymore. In January, Horowitz signed up for MOG, an online streaming music service that launched last December and costs $5 a month for access to nearly 8 million songs.

Horowitz says he hasn't bought a single CD since. After catching a National Public Radio show about jazz great Artie Shaw, Horowitz went online to listen to some tunes. That led to more sessions at MOG, which is backed by investors including record labels Universal Music Group and Sony Music. "I was a CD buyer," says Horowitz. "I don't buy CDs anymore. I have a lot of fun with MOG, and it feels like I got a terrific deal."

The startup is among a new generation of online digital music services trying to challenge Apple's (AAPL) iTunes and put a deeper dent in CD sales, which fell 30 percent to $4 billion in the U.S. in 2009, according to market researcher Strategy Analytics. These new "cloud" music services—so called because they store songs on remote servers and stream them to users' PCs, TVs, set-top boxes, or smartphones—are putting pressure on music downloading powerhouses Apple, Amazon, and Wal-Mart Stores (WMT) to adapt, say industry analysts. "Once people try this, they are going to stop downloading," says Martin Olausson, a director at Strategy Analytics. "That's the potential."

Plans by Google and Others

Microsoft (MSFT) may cut the monthly fee it charges for streaming music on its Zune portable player, says senior product manager Terry Farrell. Zune Pass, which features unlimited music streaming and 10 song downloads a month, now costs $14.99. Farrell didn't say by how much Microsoft may cut the service's price.

Microsoft is contending with rivals that offer music at little or no charge, while striving to erode Apple's lead in the market for digital music players and downloadable songs.

Google (GOOG) on May 20 announced that it plans to start selling digital music tracks for Android-based smartphones and has acquired technology that would enable it to stream music from PCs to mobile devices. "If anybody can [threaten Apple], it's somebody like Google," says independent wireless analyst Chetan Sharma. "They, too, have the marketing muscle."

Spotify, which has already made a splash in Europe with a free, ad-supported Web music service, is expected to launch in the U.S. in the third quarter of this year. The service lets PC and smartphone users share music with friends, download songs for off-line listening, and purchase tracks. Users can also pay monthly fees to skip the ads.

Skype co-founders Niklas Zennstrom and Janus Friis have started a new company called Rdio, which will let users stream music for a subscription fee, and which will launch "soon," says spokeswoman Alice Chan.

Analysts also expect Apple to launch a new music subscription service, perhaps this summer. Last December, Apple bought startup Lala, which lets users stream songs, buy downloads, and communicate with other users. Lala will be shut down on May 31, and the site no longer accepts new users, leading analysts to speculate that a streaming version of iTunes may be in the works. Apple spokesman Jason Roth declined to comment on Apple's future plans.

Eroding Distinctions

Cloud music services are eroding distinctions between various types of music Web sites, combining features of Internet radio, music download stores, and social networks. "In this new generation of services, you lose the distinctions between music that you own [and] rent," says Mark Mulligan, a research director at industry analysis firm Forrester Research (FORR).

The cloud services could breathe new life into declining Web music subscriptions to services such as Rhapsody International and Microsoft's Zune. Revenues from streaming music services in the U.S. declined 19 percent to $209 million in 2009, according to Forrester. Sales could grow to $389 million by 2014, Forrester said.

On May 26, researcher NPD Group reported that Amazon increased its share of music downloads in the first quarter and now has 12 percent of the market for digital songs and albums, the same as Wal-Mart. Amazon didn't respond to a request for comment.

Rivals Respond

Online music providers are expanding their capabilities and lowering prices to compete with the new cloud services. Rhapsody in April dropped the price of a premium music streaming service accessible via PCs and iPhones from $14.99 a month to $10 a month. Since then, the number of users who have signed up for the service has more than doubled, says Jon Irwin, president of Rhapsody.

Wal-Mart wouldn't comment on whether it plans to add additional features to its music downloading service. "We are focused on providing the best prices on music, growing our digital catalog, and offering exclusives online and in stores," spokeswoman Ravi Jariwala said in an e-mail.

Smaller startups want a share of the burgeoning cloud music market as well. MSpot, which streams radio stations to 6 million U.S. cell-phone users via wireless networks, in May began testing the ability for users to play songs stored on PCs on other devices. The company plans to expand the service in June, says Chief Executive Officer Daren Tsui. "We are going to become more like iTunes," he says. "We are taking a page out of Apple's playbook."

Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore.

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