Analysis: Will Subscription Services Drown Out iTunes?

It wasn’t hard to figure out which company was on the minds of most of the attendees at the Music 2.0 conference in Los Angeles Wednesday. Whether representing record labels or online retailers, speakers at the digital music confab couldn’t praise Apple enough for the success enjoyed by the company’s iTunes Music Store—that is, when those same speakers weren’t predicting the store would soon tumble from its spot at the head of the online music market.

But talking about toppling the iTunes Music Store is one thing; actually doing it is another. And a little more than 18 months after its debut, the online music store continues to best all rivals. Chris Bush, director of product marketing for Apple, told conference attendees that the music store enjoys a 70 percent share of the market for legal music downloads.

With the extension of service to Europe and Canada, Apple is “now covering 65 percent of the global music market,” Bell said. “There’s no evidence of a slowdown or a plateau.”

Apple is “the groundbreaking and pacesetting company” in digital music, said Michael Stroud, CEO of iHollywood Forum, which organizes the Music 2.0 event. But competitors think they’ve found an approach to online music that could knock Apple off its stride—subscription-based services.

“It’s the ultimate jukebox, being able to listen to everything and sample things without having to buy,” said Laura Goldberg, chief operating officer at Napster.

Downloads Vs. Subscriptions

Apple’s approach to online music sales is an a la carte model—it charges users a specific fee (usually 99 cents for a single download or $9.99 for a complete album) for whatever music they download. Other services, including Napster and RealNetworks’ Rhapsody, charge their users a monthly fee. Napster users, for example, pay $9.95 a month for access to the service’s 700,000-song library. (Many subscription services also let their subscribers download tracks, but for an additional fee.)

It was clear which approach the music industry executives speaking at Music 2.0 favored—a session on Analyzing the Digital Distribution Revenue Models featuring speakers from Napster, RealNetworks and MSN’s fledgling music service was essentially an hour-long testimonial on behalf of subscription-based music stores. More than one speaker cited Apple’s “10,000 songs in your pocket” slogan for the iPod and asked whether shoppers would want to pay $10,000 for 10,000 downloads or $10 for monthly access to more than 10,000 songs.

“A subscription service has more variety,” said David Weinberg, vice president of business development and business affairs for Universal Music’s eLabs. It also has a rosier long-term revenue outlook, at least according to some of the Music 2.0 speakers. Jupiter Media Metrix predicts that the revenue from subscription-based online music services will overtake revenue from music downloads; RealNetworks Chief Strategy Office Richard Wolpert told Music 2.0 attendees he believes that will happen in 2006.

While subscription services were held up as the ideal model, Apple’s approach came under fire from rival companies. “Selling 99-cent singles isn’t working,” said David Goldberg, vice president and general manager for music at Yahoo. “They’re selling a lot of iPods. Apple is doing a great job… [but] as a model for [selling to] kids, it’s not a workable model.”

To Subscribe or Not to Subscribe

It’s clear how music sellers benefit from a subscription-based model—those monthly fees provide a steady, predictable source of revenue. But what’s in it for users? There’s the variety offered by access to an entire library of streaming music—but what if you’re more inclined to listen to specific genres and artists instead of a wide variety? In that instance, a subscription music service becomes more like paying for a package of 80 cable TV channels when you only watch eight.

There’s also the issue of portability—yes, you can receive streaming music from a vast library when you’re at your PC, but how do you take that music on the road? (Subscription-based services think they may have this problem licked: Windows Media Digital Rights Management 10 software from Microsoft lets users transfer subscription-based to compatible music players.)

But for music users used to downloading songs from the iTunes Music Store directly to their hard drives, the biggest question surrounding subscription services may be one of ownership. What happens to the music you’ve been paying to hear once you’re no longer a subscriber?

So competitors may be lining up to take on Apple. But pardon the company if it’s not exactly fretting about the growing number of subscription services gunning for its business. “We think the holiday quarter is just going to be an exceptional one,” Apple’s Bell told Music 2.0 attendees.

And the company’s confidence is well earned, observers say. “Steve Jobs made buying music online cool,” said Ted Cohen, EMI Recorded Music’s senior vice president of digital development and distribution. “Some people, without being specific, are just relying on brand strength. ‘We’re so and so, so they’ll come.’”

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