Online Music Hits a Flat Note

As more outfits enter the download market, the first, tech-savvy users aren't being joined by a wider audience. More ads needed?

By Heather Green

Every few weeks seems to bring the launch of a new 99-cent digital-download service. On Oct. 12, Microsoft (MSFT ) opened its online music service (see BW Online, 10/13/04, "Microsoft Takes Aim at Everything"), while Virgin launched its own offering Sept. 27, joining services from RealNetworks (RNWK ), Apple (AAPL ), Napster and Wal-Mart (WMT ) that are already in the market.

But here's some sobering news for the outfits duking it out: According research released Oct. 12 by researcher NPD Group, the increasing number of digital-download services are competing for what appears to be a static market.

APPLE, TOO.

  The number of downloaders each month held steady at 1 million in May, June, and July, the last month for which NPD published data from the 40,000 Internet users whose surfing it monitors. That's actually down from the peak of 1.3 million in April.

For Apple, there was some bright news in the numbers. Despite the competition, Jobs & Co.'s iTunes service continues to dominate, accounting for nearly 70% of music files downloaded legally between December, 2003, and July, 2004. Napster was a distant second, with 11% of the downloads for the same period, while MusicMatch, RealNetworks and Wal-Mart each had 6% of the download market.

Even Apple may want to pay attention to the longer-term trends. The buzz about the download offerings, along with their trial promotions, helped build the services' brands and enticed first-time users. But as the excitement waned, there wasn't that much new value to keep some of those customers coming back or attract fresh ones, the NPD report suggests.

MORE EARS NEEDED.

  The downturn in the number of users paying for downloads could just be a seasonal thing. As the online world has learned, Web surfers tend to log on less often over the summer, so data from the fall may show customers flocking back.

It could also point to a need to do more sustained advertising and broader marketing to get non-technophile music fans into the habit of making at least sporadic online purchases. "The real challenge is to reach out beyond the people who are using [the download service] regularly and become more mainstream," says Russ Crupnick, vice-president of NPD Group.

What's also interesting about the pay-per-tune services' stalled growth is how their situation compares with that of the subscription services, which give users access to hundreds of thousands of tracks that they rent instead of own. If an individual stops subscribing to a service, all the downloaded tracks disappear from the user's PC.

RENT VS. BUY.

  The subscription services from companies including Napster and RealNetworks' Rhapsody, which typically cost $10 a month, don't get the same attention that the 99-cent download services do in discussions about legal digital-music offerings. But compared to the NPD download numbers, they seem to be doing fairly well. Real, for instance, says it has 550,000 subscribers to its online services, which include Rhapsody and Real's subscription radio service.

The challenge now for the 99-cent download business is for the players to figure out how to differentiate themselves. Analysts expect consolidation to be part of the answer. But if and when that happens, it looks like even the remaining companies will have to grapple with another issue: growing the market of music downloaders.

Green reports for BusinessWeek in New York