Thursday, November 20, 2003

WSJ note on the Post-iTumes Music Store World

The WSJ has a note echoing my recent observations on the post iTMS world (see below). Since you need a subscription, yadda yadda, I'll post an excerpt:
Crowded House: With the Web Shaking Up Music, A Free-for-All in Online Songs --- Companies Race to Stake Out Turf in Fledgling Market; A Shakeout on the Way? --- Sony vs. Wal-Mart vs. Apple

11/19/2003, 17:59 [The Wall Street Journal]

When Apple Computer Inc. started selling songs over the Internet for 99 cents each, the company had the field almost to itself. Now, just seven months later, so many competitors are jockeying for position in the music-download business that a brutal shakeout is all but certain.

A half-dozen companies have already followed Apple's lead. Roxio Inc.'s Napster, the once-renegade pioneer of Internet music, now lets you download songs at 99 cents a pop. And some of the biggest names in retail, technology and media -- including Wal-Mart Stores Inc., Microsoft Corp. and Sony Corp. -- will soon jump into the fray.

It's a rare moment in which technology has jolted an industry's business model and past practices, kicking open the door to a radical new distribution strategy. For decades, retailers have dominated the sales of physical copies of music on compact discs, vinyl and other formats. As more music fans download songs over Internet connections and organize music collections on their PCs, it suddenly isn't clear just who will sell music to consumers in the future and how.

But even as companies race to claim market share in what has rapidly become one of the hottest sectors of the Internet, online music remains unproved as a business. Profit margins appear to be so thin that many companies see song-selling sites as loss leaders to help them hawk other products.

Executives predict that the sheer number of companies rushing into the market and the likelihood of price battles will further crimp profits, leaving only a handful of significant players standing. "I think we will shrink within 12 months down to five or six or even down to three" companies in the online music market, says Sean Ryan, vice president of music services at Seattle-based RealNetworks Inc., an Internet software and services company that will soon begin selling song downloads through its Rhapsody subscription service.


But as they fight bootleggers, the record labels have finally given up on their long-held resistance to establishing a legitimate online music business. For years, the major record labels balked at licensing their song catalogs to legitimate music sites, and most of them burdened the music with unwieldy technical safeguards that prevented consumers from recording songs onto CDs or transferring them to portable music players.

Now, the labels have gone headlong in the other direction. Increasingly, the recording industry has made attractive licensing agreements far easier to come by, as it grows more comfortable with the Internet, and the terms of the contracts it strikes with online distributors become more routine.


Selling song downloads turns out to be a low-profit-margin business. Of the 99 cents Apple and other sites charge for a song, the companies pay anywhere from 65 cents to 79 cents in wholesale costs to music companies, analysts and industry executives say. Credit-card processing fees, bandwidth charges and costs related to customer service can, in some cases, eat up whatever profit is left over.


Competitors argue that Apple's dependence on the iPod is treacherous. Apple for now commands a premium for the device, but the iPod advantage may be short-lived, as competitors gradually improve their own music players. That will, in turn, increasingly put pressure on iPod profits for Apple, which has a long history of seeing its technical innovations copied by competitors. Already, competition is getting more intense: Dell Inc. recently began selling a portable music player that costs $50 less than the least expensive iPod. Samsung Electronics Co. makes a music gadget bearing the Napster logo.

Sony could make life even harder for Apple. The Japanese electronics giant has said it will introduce a competitor to iTunes in the spring that it is for now calling Music Box. Sony will also offer a family of portable music players, including a device that sells for $60, a fraction of the iPod's price tag. The company has hired Jay Samit, a music-industry veteran who worked for years on Internet deals at EMI, to help run Music Box.


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