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Internet Music Battles Heat Up

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Apple's announcement last week of the iTunes Affiliate Program, iTunes on Campus, and the iTunes Volume Discount program represents the next escalation in what is turning into a heated battle for control of the Internet music services (which is somewhat surprising, given that no one is yet making money on music sales, something that may never happen). With these programs, Apple is raising the bar yet again for knock-off services from companies like Roxio and RealNetworks, not to mention Microsoft's just-announced MSN Music.

<http://www.apple.com/pr/library/2004/sep/ 01itunesaffiliate.html>

The Competition -- If you haven't been paying close attention, you might not have realized that Roxio, maker of the highly regarded Toast 6 Titanium and Jam 6, is selling its consumer software division to Sonic Solutions, a company that specializes in DVD mastering software for Windows. This sale provides Roxio with $80 million to spend promoting Napster, though I'm placing my bets on Napster being crushed by Apple's iTunes Music Store (which currently has 69 percent of the market and the market-leading iPod player) and Microsoft's MSN Music (from Microsoft, so it will be seen by millions of Windows users, whether or not it's any good).

<http://www.roxio.com/en/company/news/archive/ prelease080904.jhtml>

RealNetworks, of course, has just finished about a month of selling songs from its Internet music store for $0.49 each. Analysts suggested the sale might cost Real over $2 million, leading to the question of whether the company would attract enough new customers to make it worthwhile. The sale, plus Real's Harmony technology for playing songs from its own online music services on the iPod, and Real's hypocritical "Freedom of Choice" PR campaign all feel like last-ditch efforts to make the company relevant in the Internet music marketplace. Some have suggested that Real is trying to be acquired; since the company is losing money and its stock is near an all-time low, it's possible that Real is fighting for overall survival.

<http://db.tidbits.com/article/07756>

Meanwhile, Microsoft has unveiled a test version of MSN Music, its entry into the increasingly crowded Internet music sales market. Songs will sell for $0.99 each, and Microsoft claims a catalog of 500,000 tracks, with another 500,000 to be added in the first few weeks of operation. Like Apple, Microsoft isn't expected to make money from selling music. However, Microsoft may benefit from increased use and licensing of the Windows Media music format, licensing of the reference designs for music players made by other manufacturers, and more advertising sales on MSN. Overall, MSN Music feels like a me-too service that gets Microsoft into the game and on which the company can afford to lose massive amounts of money for years (like MSN itself, and the Xbox). MSN Music shouldn't be discounted, though, given Microsoft's financial resources, marketing muscle, and tendency to get things right on the third release. Like Real, Microsoft is playing the freedom of choice card against the iPod, which is equally laughable, since MSN Music, not surprisingly, works only in Windows.

<http://beta.music.msn.com/>
<http://www.wired.com/news/business/ 0,1367,64810,00.html>

If you're confused, "freedom of choice" to RealNetworks means the freedom for Windows users to choose to buy music from Real and play it on a variety of digital music devices, including (for now) on an iPod. To Microsoft, "freedom of choice" means the freedom for Windows users to buy music and play it on devices other than the iPod. Notice that neither company even allows Macintosh users to use their service; they're both simply trying to lock users into different proprietary systems, with different restrictions.

iTunes Affiliate Program -- The most interesting aspect of Apple's iTunes Music Store announcements is the iTunes Affiliate Program, run via LinkShare (an eight-year-old company that manages affiliate programs for others), which lets anyone who links to songs in the iTunes Music Store collect 5 percent of the purchase price. Of course, at $0.99 per song, 5 percent ends up being a nickel per sale, so you'd have to drive a lot of sales for the numbers to add up to much. I think, though the legalese is a bit thick in Apple's Terms and Conditions, that you also earn the affiliate cut on songs purchased in the same shopping session, where a session can last up to 24 hours.

<http://www.apple.com/itunes/affiliates/>
<http://www.apple.com/itunes/affiliates/ terms.html>

Unfortunately, the iTunes Affiliate Program applies only to the U.S. version of the iTunes Music Store, so there isn't much point in applying unless most of your audience is from the U.S. Hopefully Apple will make it, along with the iTunes Music Store in general, available in more countries (Canada, anyone?) soon.

<http://www.apple.com/itunes/affiliates/faq.html>

One intriguing teaser: apparently iTunes affiliates can also apply to the Apple Store Affiliate Program, about which I can find no additional information on Apple's Web site. However, Apple Europe two months ago started an affiliate program paying 2.5 percent (3 percent if you hit a certain sales volume), so perhaps that will be used as the model for this otherwise unexplained Apple Store Affiliate Program.

<http://promo.euro.apple.com/promo/affiliation_ welcome/uk/>

iTunes Volume Discount Program -- Apple's new iTunes Volume Discount Program allows companies and educational institutions to purchase large numbers of songs at discounted prices - up to 20 percent off, depending on the number purchased - in the form of codes that can be then given to users to redeem. By large numbers, we're talking about a minimum of 10,000 songs for educational institutions and 25,000 for companies. And by extrapolation, even at the full 20 percent discount (which probably doesn't apply at these minimum levels), that would mean at least $8,000 for a college or university, and at least $20,000 for a company. Although companies can bundle the codes with products, they can't be resold on their own. Amusingly, Apple has a FAQ entry which notes purchasers cannot limit the songs that their codes may be used to purchase.

<http://www.apple.com/itunes/volumediscounts/>
<http://www.apple.com/itunes/volumediscounts/ faq.html>

iTunes on Campus -- On the face of things, the iTunes on Campus Program isn't particularly impressive, since its only unique feature is a site license that allows an educational institution to provide the iTunes application (and QuickTime) to students for free. Since iTunes and QuickTime are already free to everyone, this mostly translates into some small bandwidth savings from being able to host iTunes downloads locally and to distribute the program on CD.

<http://www.apple.com/education/itunesoncampus/>

In fact, the iTunes on Campus Program really just brings together the iTunes Volume Discount Program and iTunes Affiliate Program in a way that colleges and universities can use to provide a limited amount of legally downloadable music to students on both Mac and Windows, something that's not possible with any of the other (Windows-only) Internet music services. Realistically, since educational institutions aren't generally in the business of giving music to students, the main utility of the iTunes on Campus Program is thus to help protect students (and potentially the school itself) against the slavering lawyers of the RIAA.

A college could, for instance, distribute 10,000 songs via the iTunes Volume Discount Program for students, and then collect 5 percent on all subsequent purchases via the iTunes Affiliate Program to help offset the cost of purchasing that initial block of 10,000 songs. And since a college likely controls all outbound traffic, it would be possible to rewrite all links to the iTunes Music Store to make sure they were affiliate links; I can't see any language in the Terms and Conditions that explicitly forbids this.

In essence, the iTunes Music Store is CDs done right, whereas services like Napster (which is being used on a number of college campuses) are radio done right. Neither approach is necessarily better; some people prefer to own their music, at least within the limits Apple sets, whereas others will prefer to play (but not burn or copy) unlimited numbers of songs for no extra charge, as is possible with Napster. Since you "own" your iTunes Music Store purchases, you can burn them to CD, copy them to an iPod, and keep listening to them after graduation. In contrast, students using a Napster subscription at a participating university must pay extra to burn tracks to CD, use them on a portable music player, or listen to them after graduation.

Summer break is also potentially an issue. The ability to download new music ends with the semester, of course, but songs you've already downloaded can remain available as "tethered downloads" that expire some time later (three months for Cornell University, which uses the Napster service). That means Cornell students who prepare ahead of time will be able to play their tethered downloads until they return to campus; those who rely solely on the streaming will be out of luck over the summer.

Apple's approach may put it at a disadvantage in one way. Since students who download a lot of music during school will be loath to download it again from another service, the path of least resistance is to pay the Napster subscription fee after graduation. Of course, that raises the question of whether educational institutions should be paid to get their students hooked on Napster.

Where Apple Needs to Look -- These recent announcements show that Apple is by no means sitting still, although it remains to be seen how popular these various programs will be, given that they aren't of much interest to the individual users who are Apple's most loyal adherents. That said, I think there are several additional areas Apple would do well to investigate.

  • Streaming/Tethered Downloads: When Apple first introduced the iTunes Music Store, I was disappointed that there was no streamed iTunes Radio with songs from and links to the iTunes Music Store, since I find the 30-second clips rather annoying. I'd pay a subscription fee to listen to streamed songs in particular genres or from large groups of artists. Of course, such a service would have to make it trivially easy to purchase the song while it's playing, and it could either get by with a significantly reduced bitrate or could rely on the tethered download model used by Napster. The Windows-only Rhapsody service from RealNetworks also operates roughly on this model.

<http://www.listen.com/>

  • Video: In the MSN Music announcement, Microsoft made sure to note that some of the players that can play purchased music also have small color screens that can display video. It's entirely likely that much video is still too large and too hard to market (what would you pay to watch a TV show or movie on an iPod-like device?), but it's only a matter of time before it happens. Apple may want to be the company that makes it happen.

I will admit that when Apple first released the iPod and started selling downloadable music via the iTunes Music Store, I didn't anticipate that it would become such a key portion of the company's business. (In the last two quarters, Apple sold roughly as many iPods as Macs.) I don't see Apple losing focus on the Macintosh and Mac OS X, but I think it's now clear that while Apple must continue to execute in the Macintosh world, the battles that are being fought over Internet music services and portable music players will play a significant role in the company's future.

 

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