Music-Selling Rivals Take Aim at iTunes

By Frank Ahrens and Mike Musgrove
Washington Post Staff Writers
Wednesday, August 22, 2007

Apple's market-leading iTunes online music store took a one-two punch yesterday as heavyweight rivals stepped up their efforts to unseat the king of digital music.

Wal-Mart, the largest compact disc retailer in the United States, has begun selling some of its digital songs online for 94 cents each, significantly undercutting the iTunes price, the company said yesterday. More importantly, the music will not be fettered by copy restrictions, which means consumers will be free to burn the songs on CDs, play them on almost any device and send them to friends on the Internet.

Also yesterday, Real Networks said it would combine its Rhapsody Internet music player with the pop-culture power of MTV and sell songs over the Verizon Wireless network to mobile phones and other handheld devices.

Though unrelated, both efforts aim to chip away at iTunes's hold on the digital music market. Analysts said that nearly 70 percent of all songs sold online come from Apple's iTunes store.

The developments yesterday were yet another blow to the chain record store and the CD. After failing to emerge from bankruptcy protection, Tower Records closed its U.S. outlets last year. In April, beset by piracy and online song sales, the Recording Industry Association of America reported that revenue from CD sales slumped 13 percent in 2006, its steepest yearly drop by far.

To help make up for falling revenue, music companies are selling most of their catalogues on the Web. The artists are now the sticking point. For instance, Britain's EMI Music has been unable to persuade the surviving Beatles to sell their songs online. In recent months, music companies have begun loosening their copyright-protection rules and letting consumers buy restriction-free songs. The change has also meant improved sound quality.

The standard, copy-protected songs on iTunes cost 99 cents each; on Wal-Mart's site, they cost 88 cents. The EMI restriction-free songs on iTunes sell for $1.29 each, or 35 cents more than the same songs on Wal-Mart's Web site.

ITunes and the first iPod debuted in 2001. Apple has sold more than 3 billion songs on iTunes, making it the nation's third-largest music retailer, and more than 9.8 million iPods were sold during the third quarter of this fiscal year alone. The iPod is the nation's most popular digital music player.

Other digital music services, such as eMusic, Rhapsody and Napster, have attempted to fill the few gaps left by iTunes. EMusic, for instance, sells less-mainstream music. Rhapsody has a subscription service for renting music. And others sell music that can be used on different players, such as Microsoft's Zune.

But none has managed to grab the market share of iTunes and the iPod, which have resonated with consumers for their one-stop-shopping aspect and ease of use.

The announcements yesterday may represent the first serious challenge to Apple's digital music hegemony. For MTV, Verizon and Real Networks , it is an attempt to tap into what many believe will be a growing market for selling songs to cellphones rather than digital music players.

"Our audience has made it crystal clear that they really want their music accessible wherever they might be," said Van Toffler, president of MTV Networks Music, in a conference call announcing the partnership. MTV previously had partnered with Microsoft on an unsuccessful online music service called Urge; that service will be phased out in favor of Real Networks' Rhapsody.

Rob Glaser, chairman and chief executive of Real Networks, said the service will deliver a "jukebox in the sky" for its users. The companies did not announce pricing or a release date for the service, which is still in the works.

"It's a pretty good combination," Jupiter Research analyst Michael Gartenberg said of the MTV and Real Networks announcement. "It's got some potential."

Nevertheless, he said, neither announcement gives Apple much to worry about at this point. "There's still a natural propensity for consumers to follow the path of least resistance -- and for most consumers, that leads to Apple," he said. "This doesn't change the game dramatically."

Wal-Mart has sold songs online since 2003. But those songs suffered from two constraints: They could not be played on the iPod, even though Wal-Mart sells iPods, and they came with copyright protections.

Wal-Mart, the world's largest retailer, is known for its ability to stock big stores, pressure suppliers into keeping prices down and bring in customers. It has been less successful selling on the Web. When the company began selling music online, some analysts said, Wal-Mart's retail genius and lower prices would spell the end of iTunes, a prediction that has so far failed to come true.

Wal-Mart's announcement that it now will sell restriction-free music online, however, may be the spark that brings the retailer into the digital age. Wal-Mart opens its catalogue with songs from Universal Music Group, the world's largest music company, and EMI, which began selling restriction-free music online in April.

"Wal-Mart has been behind on the issue of digital music," said Tim Bajarin, an analyst with Creative Strategies. "Making this move allows them to leapfrog to the front."

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