Analysis: Recent moves mean stepped-up competition for iTunes

At third place in U.S. music sales, iTunes may still lag behind Best Buy and Wal-Mart, but it remains the undisputed king of the online arena, commanding more than 70 percent of digital sales. But uneasy lies the head that wears the crown, and nothing makes that clearer than the lengths to which rivals will go to topple iTunes from its dominant perch.

Here’s a round-up of all the latest developments in the online music world involving would-be contenders eyeing on Apple’s crown.

DRM-free music—tracks that can be played by anyone on any device—has become a buzzword this year, ever since Steve Jobs’ open letter on the subject last February. In May, Apple teamed up with EMI to offer DRM-free tracks of the label’s entire catalog, the first of the major labels to do so.

But it wasn’t the last—earlier this month, Universal Music Group announced that it too would begin offering a portion of its catalog without Digital Rights Management until the end of January 2008, as an experiment. But while Universal’s plans included making tracks available through a variety of different online partners, Apple’s name was notably absent from the list.

Retail giant Wal-Mart, who holds down the top spot for total U.S. music sales, due in large part to its extensive brick-and-mortar chain, is one of the online stores that will offer DRM-free tracks from both Universal and EMI. Wal-Mart also continues to sell music in Microsoft’s WMA format, protected by the Plays For Sure DRM scheme, which is incompatible with the iPod as well as other players, such as Microsoft’s own Zune.

Unfortunately, Wal-Mart’s service suffers from several limitations, both technological and content-related. For one thing, Wal-Mart will not sell tracks it deems explicit; for another, using the service, even to download the DRM-free MP3s, requires Windows and Internet Explorer. The use of Boot Camp or virtualization software like Parallels Desktop makes the process possible—but laborious—for Mac users.

Music unencumbered by DRM restrictions is also a primary selling point for a new joint service from MTV and Real Networks dubbed Rhapsody America. Both companies had launched online music stores in the past few years based on Microsoft’s Plays For Sure, but neither had approached the success of iTunes.

This month, the two companies announced that they, along with Verizon Wireless, would be combining to create Rhapsody America. “By bringing together the cultural and musical heritage of the MTV Networks family with the functionality of Rhapsody and the reach of V CAST Music, it’s like we’ve put the best lead singer, drummer and guitarist all on the same giant stage, allowing music fans to experience the purest music play in any way they want,” said Van Toffler, President of MTV Networks Music & Logo Group.

As part of this deal, MTV’s Urge store will cease to exist, and existing Urge customers will migrate to Rhapsody. Pricing will be competitive with iTunes, but while Rhapsody America no doubt hopes to tap the millions of iPod owners that have helped propel Apple’s online music venture to great success, the fate of Mac owners is up in the air. The previous offerings from MTV and Real Networks weren’t Mac-friendly; Rhapsody offered Mac users the ability to stream music from its Web site, though it didn’t provide an OS X client.

Will DRM-free offerings be enough to tempt iPod owners who’ve embraced the simplicity of iTunes? Little else has—not subscription-based services and not rival devices from major players like Microsoft. But with companies now joining forces to take on iTunes—and record labels like Universal exerting their influence—Apple’s hold on the digital music market bears watching.

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