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Downloading: The Next Generation

Which One Is the Betamax?

Those who argue that legal downloading is just as good as file swapping, for a small fee, face another uncomfortable reality: Concerns over compatibility among the various players and digital formats -- known as "interoperability" -- seem to be increasing.

For example, Napster to Go users are told that for $5 a month extra, they can take their downloaded sounds wherever they want to go -- unless their portable player is an iPod, because iPods aren't compatible with the Microsoft software that Napster uses to protect the playlists.

The (Legal) Digital Music Marketplace
From washingtonpost.com at 8:53 AM

ITunes: Spurred by the runaway popularity of the iPod player, Apple's iTunes has grown to become the nation's most successful download store, selling more than 250 million tracks -- typically for 99 cents each -- since its launch in 2003.

RealNetworks: Best known for its ubiquitous "RealPlayer," the company offers one-song-at-a-time downloads as well as $10 monthly subscriptions to the unlimited-download Rhapsody service.

Napster: Named for the underground file-swapping service that started it all, the reborn Napster offers a subscription similar to Rhapsody, with a "To Go" service allowing transfers to approved portable players for an additional $5 a month.

MusicMatch: Owned by Yahoo, MusicMatch offers a range of services including a la carte downloads, Web radio and a subscription service.

MusicNet: Unlike its peers, MusicNet doesn't operate a retail store. Instead it provides the back-end download technology for companies like America Online and Virgin Digital.

Wal-Mart: The retail giant sells a la carte downloads at 88 cents a song.

Buy.com: The Internet retailer offers 79-cent singles from major-label artists.

MP3tunes.com: Launched by the founder of the now-defunct MP3.com downloading site, the service offers 88-cent downloads of songs from independent artists.

Emusic: This smaller service specializes in independent labels, offering bulk downloads for a monthly fee.

Peer Impact: Still in its testing phase, Peer Impact would allow users to share files while digital rights management technology automatically determines what fees they owe.

Ruckus Network: Ruckus specializes in the college market, offering music and movie downloads through arrangements with universities.

Cdigix: Another company specializing in the college market, Cdigix uses MusicNet's technology.

--David McGuire

_____Digital Rights_____
Artists Break With Industry on File Sharing (The Washington Post, Mar 1, 2005)
High-Tech Tension Over Illegal Uses (The Washington Post, Feb 22, 2005)
Disparate Cast Lobbies Court To Restrict File Sharing (The Washington Post, Jan 26, 2005)
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With each player and service using slightly different file formats, standards and security tools, users may have less freedom to use their music than they think. IPod owners who buy music from iTunes might get a shock if they buy new devices from Creative Labs or Dell and try to pull their iTunes songs onto them.

"That is something that we struggle with and it is a definite obstacle. I hope at some point digital music will be simpler in that respect, but I think that's still a long way off," Napster's Harris said. Wolpert called interoperability concerns "potentially the biggest obstacle to mass consumer adoption."

Sony's Hesse and EMI's Cohen say that they may need to lean on the retailers to make their services more interoperable. "I think we need to make significant strides in 2005 to improve that situation," Hesse said.

The company that did the most to get legal downloading off the ground may also be the lead weight on a market whose consumers like to shift among different players and services, taking their libraries with them. In addition to shutting out Napster, Apple also prompts iPod owners to use iTunes as their PC media player and online music store, making it difficult or even impossible to buy tracks from other retailers and move them directly to their devices. About 90 percent of the hard-drive-based music players sold in the United States are iPods, according to Piper Jaffray analyst Gene Munster.

"Apple has opted to keep iPod proprietary and not let people who own them choose how they want to get digital music," Harris said.

Representatives for Apple reached by telephone and e-mail repeatedly declined to be interviewed for this story. While its adherence to a proprietary model may eventually become an obstacle to widespread adoption, Apple's strategy is sound business and unlikely to change any time soon, said Gartner G2 analyst Mike McGuire.

"In a perfect world it would all be interoperable, and everybody would make money, but in a market-driven world, is there a business case to be made for making the iPod interoperable? I don't know," McGuire said. Apple chief Steve Jobs "is doing what any business would do," he added.

'An Introductory Price'

Finally, the question of how much digital music should cost remains unanswered. Some market observers and retailers say the current prices, particularly for individual downloads, may be too high. One-time promotions aside, the industry's standard rate for downloads has hovered fairly steadily at the dollar-per-song level since its inception.

RealNetworks offers both the Rhapsody subscription service and an a la carte download store. When the company offered downloads at 49 cents a song during promotions, sales tripled, Wolpert said. But RealNetworks took a loss to offer those promotions, he said, because the record companies won't lower their per-song rates.

IDC's Kay said more pricing flexibility would help, but added that he doesn't see much downward pressure on prices: "If Apple has managed to sell a quarter of a billion songs, it would be hard to tell them they're overpriced, but I would like to see it cheaper and more portable."

But others argue that 99 cents a song is actually too low. Ditto the $14.95 a month for Napster to Go. "I think [that] can only be an introductory price," Sony's Hesse said. He acknowledged that record companies save money by not having to manufacture and ship CDs, but noted that the labels still bear substantial artist-development costs, which don't fit well into a one-track-at-a-time economic model.

This means runaway success of services like iTunes could end up threatening the music industry's bottom line more than widespread file sharing, which is still somewhat marginalized, BigChampagne's Garland said. "At 99 cents you'll succeed yourself right out of business if you're not careful."

And whatever the correct price point and proper distribution model is, the music industry doesn't have the luxury of a lot of time to figure it out, said Gartner's McGuire. "They're all part of the big media conglomerates. It's not like they can go to their corporate heads and say, 'Hey, can you give us a couple years off from contributing to the bottom line, because we've got to figure out this whole digital music thing.'"

Meanwhile, the specter of unlicensed peer-to-peer trading looms, and would-be consumers like Kelly face a choice between unrestricted -- and unlawful -- file swapping on unlicensed networks, or a legal experience that may not be exactly what they're looking for.

"The legality thing is a definite bonus and if it had been like that the whole time, it would be easier to adapt to," the Maryland student said. "But if you're used to downloading illegally ... and getting away with it, I can't imagine most people I know would pay to get less. ... Why buy the cow when you can steal the milk for free?"

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