Analysts: Apple safeguards online music lead

Apple Computer Inc. CEO Steve Jobs on Wednesday briefed industry analysts and media on the third generation iTunes Music Store, details of which were first revealed on MacCentral earlier this morning. Industry analysts feel the new release will not only increase the pressure on Microsoft Corp., but also safeguard Apple's lead in the competitive online music download market.

"Today we are celebrating the first anniversary of the iTunes Music Store and we are thrilled with the results we have seen in just one year," said Jobs. "In its first year, music fans have purchased more than 70 million songs, clearly making it the number one online music service in the world, having more than 70 percent market share for singles and albums."

iTunes Music Store customers are currently purchasing 2.7 million songs per week, which puts Apple on track to sell 140 million songs a year. Jobs also said that while the music store started out with 200,000 songs a year ago, it currently has 700,000 songs and will increase to 1 million songs by the end of 2004.

Song downloads are sure to increase with the unveiling by Apple of a free weekly download for iTunes users. Every Tuesday the company will make one song available for free to all customers, something analysts think will pay off big for the company.

"The digital music download market is poised to become ultra-competitive and in order for Apple to maintain its market lead it must continue to increase the iTunes value proposition," Tim Deal, Senior Analyst with Technology Business Research, told MacCentral. "Customer demands are simple -- they want a lot of music choices and variety, they want an easy-to-use solution, and they don't want to pay a lot for it. Apple's latest iTunes Music Store upgrade promises all of these things and some free songs to boot. Whenever a company tosses the word 'free' into the mix, customers take notice. I think this a particularly effective marketing tool for Apple."

As with most online or retail freebies, Jupiter Research Senior Analyst, Joe Wilcox sees the free download as a draw to get people to purchase other songs.

"I see the freebees as an extension of the Pepsi-iTunes promotion, meaning a mechanism for drawing people to the store where they might buy something else with their free music," said Wilcox.

Jupiter Research sees many of iTunes 4.5 new features matching research surveys they have done. For example, Jupiter says that among consumers' priorities for music they own is the ability to share songs with others.

"Apple addresses this priority with the new iMix feature, which lets iTunes users share their playlists via e-mail, post them on the music store or rate songs in posted playlists," said Wilcox.

In addition to the new features added to the iTunes Music Store, Apple also made two changes that will affect the company's Digital Rights Management (DRM), Fairplay. As of iTunes 4.5 Apple will allow users to play music on five different computers, up from three in previous versions.

The other change to DRM affects the number of times a user can burn the same playlist. Before the new version users could burn a playlist 10 times, but that has been limited to seven times now. Jobs said this changes is a result of negotiations with the music labels, but doesn't think it will affect users in a negative way.

"Honoring our commitment to discourage music theft -- while preserving personal use rights -- we listened to the labels and looked at the data they had," said Jobs. "In conjunction with them we are reducing the number of times a user can burn the same playlist onto CDs from 10 to seven. We don't think this is going to affect very many of our customers at all.

"It really is hard to understand why the average, honest individual would even make seven copies of the exact same playlist on to CDs," said Jobs.

While the number of times a single playlist can be burned has changed, users can still burn a single song as many times as they like.

The added support for Windows Media Files in iTunes 4.5 is something that Apple sees as really helping them in the Windows market. If a Windows user already has a music library in the WMA format, iTunes will automatically convert the library into the Apple supported AAC format.

"Keep in mind that MP3 remains the most popular format," said Jupiter's Wilcox. "However, because Windows Media Player rips to WMA and doesn't come with a high-quality MP3 decoder, some consumers may have unwittingly created vast WMA collections that won't play in iTunes. Apple's converter creates another option, at least with respect to iTunes."

But the WMA converter only converts music that is not encrypted with some form of DRM. So Windows users who purchased music online in WMA format from another service may be out of luck for now.

While Jupiter Research surveys show that few consumers have amassed huge music libraries of any kind, whether ripped themselves or purchased from a music store like iTunes, analysts feel that it is something Apple may have to address in the future.

"The conversion doesn't apply to WMA DRM music purchased at other music stores," said Wilcox. "That means Apple hasn't solved the problem for HP PC users that may have purchased WMA DRM music from the likes of MusicMatch or Napster. At some point, Apple and HP may need to figure out a solution for these consumers."

While noting that the online music business still had a lot of things to work out, Jobs sees a lot of opportunities in the future. For instance, because of distribution costs, shelf space and other factors associated with the retail market, less than one-third of music companies' music library is available to purchase in a traditional brick and mortar music store.

"One of the most exciting things for us is to get that catalog -- which has not been available for decades in some cases -- digitally encoded on the iTunes Music Store, where there is no rent for the shelf space, and make that music available to everybody," said Jobs.

Jobs addressed two rumors that have been circulating -- one very old rumor about the future of the iPod becoming a video device or something more akin to an iPhone and the second more recent rumor about coming price hikes at the iTunes Music Store.

"The price for songs on the iTunes store will remain at $0.99, said Jobs. "We think that's what customers want and that's what we're delivering -- any rumors to the contrary are simply not true."

On the rumored video iPod or other such device, Jobs made his position very clear.

"It's the music stupid," said Jobs. "We have to stay focused on the fact that people are buying these devices to listen to music. We are really focused on music because that's where we think the revolution is."

Jobs confirmed during the call that the iTunes Music Store did make "a small profit" last quarter. He declined to elaborate further.

In its first year the iTunes Music Store and the iPod have put Apple in the center of the legal online music downloads, controlling most of the market for downloads and portable MP3 players.

"It has exceeded our wildest expectations during its first year, said Jobs. "We are really excited that with iPod and iTunes we can show with Apple's innovation, engineering and marketing can do, when we're not limited by our five percent operating system marketshare ceiling."

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