SEPTEMBER 5, 2006

NEWS ANALYSIS

By Catherine Holahan

Meet the iTunes Wannabes

From MySpace to AOL, the list of would-be iTunes rivals is getting longer, but don't expect them to knock Apple from its perch just yet

There's a lot of buzz of late about new iTunes competitors that aim to change how you download music for portable devices. Haven't heard it? Turn down your iPod.

On Sept. 5, News Corp.'s (NWS) MySpace is announcing a partnership with digital music service Snocap that will let artists sell music directly to consumers through their MySpace pages. Buyers will then be able to transfer songs to any music player, including Apple's (AAPL ) iPod (see BusinessWeek.com, 9/3/06, "MySpace's Musical End Run").

That news followed a Sept. 1 announcement by Samsung that it will offer downloads through an online partner and came days after Time Warner's (TWX ) AOL unveiled a new service the same day Universal Music Group said it's teaming with SpiralFrog.com to offer free ad-supported downloads.

NEW MODELS. The arrivals are flocking to an already crowded market dominated by Apple's iTunes, which controls 70% to 85% of legal digital music in the U.S., depending on the estimate. The market generated $400 million in 2005 and is expected to reach $14 billion by 2011, according to Britain-based Jupiter Research.

What sets apart this fresh crop of download upstarts? One way or another, they're all departing from the pay-per-song business model that iTunes has mastered (see BusinessWeek.com, 11/21/05, "Online Music's Elusive Bottom Line").

Some are combining pay-per-download service, where the user pays a fee for each song purchased, with monthly subscriptions. That's a tack long taken by an earlier vanguard that includes Yahoo! (YHOO ) and RealNetwork's (RNWK ) Rhapsody. The hope is that a combination of these two methods will appeal both to music aficionados who want a smorgasbord of choices and those who want a sampling.

USER CHOICE. AOL is one of the companies banking on the dual model. Its new Music Now service offers both a 99 cents-pay-per-track service and a $14.95 monthly subscription that lets users download an unlimited number of songs. "We want to put the choice in users' hands, and we want them to be able to choose what device they want to use and what is the model that best fits them," says Amit Shafrir, AOL's president of premium services.

Samsung, through its partner MusicNet, is following a similar strategy. So might Nokia (NOK ), which bought online digital music platform Loudeye (LOUD ) on Aug. 8 to offer its consumers the ability to purchase digital music (see BusinessWeek.com, 8/9/06, "Nokia Goes Ear-to-Ear with Apple").

SpiralFrog.com is experimenting with an altogether different, and little tested, approach. Beginning in December, SpiralFrog.com will offer free downloads, but serve up advertising in the form of rich media, video, and banner advertisements during the 90 seconds it takes to download the song. Once downloaded, the songs can be played on portable music devices for up to six months.

DIFFERENT STROKES. SpiralFrog has struck an agreement to share ad revenue with Universal and is on the hunt for similar arrangements with other big labels. SpiralFrog Chief Marketing Officer Lance Ford says that he sees the ad-supported model becoming a new standard for labels, which have struggled to get young music consumers away from free file-sharing sites such as LimeWire and onto pay-to-play services. Ford says users would put up with advertising in exchange for the assurance they're getting what they want—free of viruses or malware. "It is a new business model for the Internet and a paradigm for the labels," says Ford. "They are essentially paying for the music with their time, but there is no cost."

But can the market support so many different models? "Absolutely," says Mark Mulligan, vice-president of Jupiter Research. Each focuses on a slightly different segment. Subscriptions appeal to music lovers who want to discover new songs and artists, while pay-per-download services cater to those searching for particular songs, he says. The free service, meanwhile, captures consumers who are accustomed to getting songs for free and are unlikely to pay for music.

Still, don't expect the new services to threaten iTunes anytime soon, says Wendy Abramowitz, an analyst at Argus Research. She didn't change her positive outlook on Apple when she heard of the new competitors. "We have seen other companies entering the music download space and to date there has been no substantial impact on Apple's prospects, so I would expect it to be similar this time around," she says.

DOWNLOAD DOMINANCE. A big reason for bullishness on Apple's prospects: the iPod. Apple not only dominates legal music downloads, but also the handheld devices on which they're played. The company has sold more than 50 million iPods around the world and except in the case of MySpace, songs downloaded through non-iTunes players won't work on the iPod. Until a new player compatible with these services gains popularity, it is unlikely that massive numbers will switch their music buying habits, says Mulligan.

Microsoft (MSFT) plans to mount a challenge by the end of 2006 with its Zune media player. However, it is unlikely to take a big bite out of iPod sales, Shaw Wu, an analyst at American Technology Research, wrote in a recent research note. For starters, the Toshiba-made device is too similar to a Toshiba's Gigabeat and includes wannabe iPod components such as a fake clickwheel, Wu noted.

Wu described the device as "underwhelming," citing specs filed with the Federal Communications Commission. Zune is more likely to cannibalize sales from other companies, such as Creative Technologies (CREAF ) and Sony (SNE ), which use Microsoft hardware in their media players. "We believe its success will likely come at an expense and be limited by its lack of differentiation vs. other Windows players," Wu wrote.

KING OF THE HILL. There's a chance rivals can erode Apple's lead at some stage, Mulligan says. The digital music player giant may eventually suffer from its own market dominance, he reckons. "If you are trying to build your market on coolness, that doesn't sit very well with mass market," he says. "Apple could be a victim of its own success."

But even he doubts the victimization is imminent. "All that said," Mulligan adds, "I don't see Apple being toppled from its throne any time soon."