Hey, iTunes, Move Over

Apple may have a lock on digital music, but competitors ranging from online retailer Amazon.com to social network imeem are trying to worm their way in

There's no doubt that Apple (AAPL), with its elegant 99¢-per-download formula, is the dominant force in digital music. But it's next to impossible to find an industry expert who thinks that Apple's current approach will remain the only game in town forever. Now there are signs rivals will help shape the future of digital music as well.

Some of the most immediate pressure is coming from Amazon.com (AMZN), which launched its Amazon MP3 store on Sept. 25. The store offers a few things Apple doesn't. First, there's pricing. Amazon MP3 sells 1.8 million of its 2.5 million-plus tracks, including 100 of the most popular, for 89¢, rather than 99¢. Also, it sells music only in the basic MP3 format, without any antipiracy "digital rights management" (DRM) software.

To now, the store includes music only from EMI, Vivendi's Universal, and thousands of indie labels, but industry insiders expect holdouts Sony BMG and Warner Music Group (WMG) to follow suit next year. This is key because MP3 tracks will play on almost any digital device, including iPods. By contrast, EMI is the only major label that has given Apple rights to sell its catalog in DRM-free form—and even those songs won't play on many devices because they're based not on MP3 but on a lesser-used alternative called AAC.

The upshot: People who want an iPod but don't want to be tethered to iTunes—or who want to buy songs that can be played on whichever device they choose—suddenly have another option. Amazon has long dominated online CD sales. With its one-click checkout and battle-tested recommendation engines, it is one of the few companies that can give Apple a run for its money in creating a compelling shopping experience. Plus, it's got 72 million active users who can now comfortably log on knowing they can find more DRM-free music than anywhere else—if not in digital form, than in a CD. "That's a big advantage," says Bill Carr, Amazon's vice-president for digital music.

All Eyes on imeem

Carr won't divulge any sales numbers, but doesn't dispute buzz that Amazon MP3 is off to a fast start. "We're very excited about where we are right now." Indeed, some industry watchers think Amazon has plenty of clear sailing ahead. "I won't be surprised at all if Amazon has 20% market share (of the download business) by the end of 2008," says Paul Verna, a music analyst with eMarketer.

While Amazon aims for a piece of Apple's download-to-buy pie, others are making progress building new digital music businesses. More than 19 million people now share their music at the fast-growing social networking site imeem. It all seems to be legal, thanks to pioneering licensing deals the four-year-old company has cut with three of the four major labels.

Rather than insist on a high per-song royalty and a load of antipiracy strictures, these deals let imeem's users freely share their copyrighted songs. That's because the labels don't make their money off the music itself, but by getting a cut of the advertising that imeem drums up for the site. Imeem CEO Dalton Caldwell says that roughly half of its revenue goes back to the content owners, on a pro rata basis. The more times a label's songs are played, the more they get paid.

Wooing the Napster Generation from Pirated Music

The imeem experiment is being closely watched as a potential trailblazer of a new ad-supported model. Caldwell notes that music companies have never made money from advertising, choosing to make their songs available free on radio stations, Viacom's (VIA) MTV, and more recently News Corp.'s (NWS) MySpace as a way to promote vinyl and CD sales. Indeed, Universal seems to be tiring of giving it away for free. In recent days, MySpace began restricting play of Universal songs to 90-second clips, rather than full songs.

By making music available in compelling new ways, imeem and others could potentially woo members of the Napster generation away from unsanctioned piracy sites. "We think the opportunity for real revenue growth is for ad-supported music," Caldwell says. "It can be as big as the download business, and Apple doesn't have a stranglehold."

Success for imeem—not to mention a slew of other Web 2.0 upstarts such as iLike, Pandora, Slacker, and SpiralFrog—doesn't necessarily mean bad news for Apple. People may listen to music on these sites on their PCs, but then purchase them from iTunes to ensure they can be played on an iPod.

Does Music Come with Those Minutes?

Still, the rising interest in non-iTunes sites gives hope to competitors that do aspire to dent Apple's market share. On Dec. 5, cell-phone giant Nokia (NOK) announced that many of its new phones would come with a "Comes with Music" service that lets them download as many songs (BusinessWeek.com, 12/4/07) as they want for free, for a year.

Then there are music subscription service providers that charge a monthly fee for access to vast quantities of music. While demand for subscription services has failed to match expectations so far, many industry experts think that subscriptions may end up as a mass-market phenomenon. With more people having access to broadband networks, it's becoming more feasible to give them access to their music anywhere, at any time.

The trick will be convincing labels to lower their prices so that subscription services cost less than $5 a month—and educating consumers as to why they'd want to pay for something many people get for free or in cheap bite-size chunks from iTunes. "People spend $10 a month to get an extra 400 minutes on their cell-phone plan," notes Bob Kohn, who founded eMusic in 1997 and now runs RoyaltyShare, which processes music royalty payments. "Why wouldn't they spend that to get access to all the music that has ever existed?"

Of course, no company has more marketing, design, and brand power than Apple to make one of these alternate models work. Indeed, even rivals admit that Apple CEO Steve Jobs still holds most of the cards. In the time it takes to give a keynote speech, Jobs could embrace and exploit these emerging models. And let's say Apple does lose its chokehold on online music, and it becomes a commodity that flows easily across devices and services as easily as e-mail does today. Even then, its hardware preeminence might enable it to sell more, not less, of its products. "Apple's never been in the music business; they're in the iPod business," says one admiring rival. Having won the hearts of millions of new customers with its iPods, iPhones, and Macs, "they've already won. At the end of the day, does Apple even care if you buy music from iTunes?"

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