By Kevin Zimmerman
Special to the Tribune
September 4, 2004

The widespread distribution of digital music is finally starting to pay off for the recording industry.

Following years of angst and now litigation toward people who use file-sharing networks to freely copy music, the industry is seeing legitimate competition that allows millions of consumers to buy songs for 99 cents apiece.

This week, with the introduction of Microsoft Corp.’s music download service, MSN Music, recording companies will see even more consumers buy music online. Others expected to launch services in the near future include Amazon.com, MTV, Virgin Records and Yahoo Inc.

Legal music downloads are "an evolution, not a revolution," said Michael Goodman, senior analyst of media and entertainment strategies at the Yankee Group. "We’re projecting that within three years (digital services) should make it to around 10 percent, and within five years to 20-25 percent of the total market."

In 2003, the first year digital music sales were tracked, estimates for the U.S. market – which include music downloads, subscription services and ring tones for cell phones – put sales at about $80 million. That’s less than 1 percent of the total $11.8 billion music market.

But this year, those trends have exploded. Weekly sales of digital tracks have grown from about 300,000 last year to nearly 3 million this year, according to Nielsen SoundScan. Apple Computer Inc., which opened its iTunes music store in April 2003, has sold more than 125 million downloads – with most of those coming this year.

Though Apple’s iTunes has captured the lion’s share of the downloads, not everyone is entirely satisfied with the service.

"Apple has not done a great job of making people aware of music that they weren’t already aware of," said one record label vet. "The ability of an MTV to get me to try new music represents a much deeper set of educational tools".

Although an MTV representative declined to comment, several sources said the music channel would offer an iTunes-type store by late 2004 or early 2005; MTV.com already offers a limited number of downloads.

Meanwhile, Microsoft Corp. finally made its presence known Thursday with its own online music service. Roughly patterned after iTunes – including downloads for 99 cents per song – the store is expected to make a splash, due to its name recognition and the employment of its Windows Media format.

The format already is available on most Windows-based PC’s and on portable media players from Rio Audio and Creative Technology. But music downloaded from the MSN Music site will not play on Apple’s iPod, the most popular portable device.

That Microsoft faced an uphill climb against the well well-established iTunes doesn’t appear to faze most observers.

"They’re similar to Apple in that they don’t really care if they make money at it," said one music industry executive. "It’s more about furthering their technology, licensing media players and the rights-management software that goes with it."

Still, there is considerable debate as to the shape digital delivery of music will take. Currently the main contenders offer single-track downloads and albums, such as those offered at iTunes and Walmart.com. Other services offer digital subscriptions, which allow consumers to select what music is played over their devices without actually downloading or owning the songs themselves.

Both models are offered by such services as Napster, Rapsody and Musicmatch.

"Subscription and download models can c-exist very nicely," said Ted Cohen, EMI’s senior vice president of Digital Development and Distribution. "We’re not anticipating a situation where one wins over the other."

Others aren’t so sure.

"People have always associated music with something you own, because historically there was no option," said Napster President Brad Duea. "But with subscriptions, for about the price of a CD, you can get unlimited access to all the music we offer (roughly 750,000 songs.)"

"Our research has found that a lot of people now have CD collections that are collecting dust. By exposing consumers to subscription, they can listen to their favorites and, by exploring our recommendations, they can discover new music as well."

A focus on subscriptions

Richard Wolpert, chief strategy officer at RealNetworks, which oversees Rhapsody, said that although his service offers both downloads and subscriptions, "we are definitely focusing on a subscription market. It’s a much better business model economically, plus you’re developing a relationship with a customer that is longer, through a recurring billing cycle."

Apple remains adamant that a la cart downloads are the way to go, and some analysts tend to agree. Forrester Research, for example, predicts that a la carte revenue will total $3.20 billion by 2008, more than double its projections for subscriptions of $1.37 billion.

The next big step appears to be allowing consumers to enjoy music subscriptions via portable devices, a development that could become available next year.

With the "tethered" portable devices, subscribers can access thousands of available tracks on three PCs and a portable for about $15 to $20 per month.

"For a 20 gigabyte player now that holds 5,000 songs, that’s going to cost you $5,000 if you’re doing it all by download," Duea said. "Now you can fill that device and change the content every day if you want."

Another possibility is the digital media adapter, a $100 to $200 box that hooks up to a stereo and wirelessly pulls music from a PC.

"You can go to your stereo and hear virtually every album, on demand, to play as much as you want," said Wolpert. "Apple likes to promise 5,000 songs in your pocket; we offer 700,000 songs in home stereo."

Ultimately such content could be distributed to cell phones.

In July, Apple and Schaumburg-based Motorola Inc. announced a deal for users of certain new Motorola phones to download songs from iTunes. The phones are expected to be available next year.

CDs the new eight-tracks?

Opinion differs on what all this means for the venerable compact disc. Some feel the format could be as dead as the eight-track tape within 15 years. Others, such as EMI’s Cohen, believe CDs will simply evolve into newer formats such as DVD Audio and Dual Disc (with CD on one side, DVD on the other).

The industry at large does exude a sense of having learned some lessons, however.

"Having our hats handed to us was a very humbling experience," said Michael Nash, senior vice president for Internet Strategy and Business Development at the Warner Music Group.

"We now feel that new media is absolutely essential to the future, and we are developing lots of formats, to the point where we will become multimedia in nature."