The launch of the Microsoft digital-music store takes direct aim at Apple Computer Inc.'s dominant iTunes service, setting off a battle of the bands between the online music sellers and their rock-star frontmen -- Bill Gates and Steve Jobs.
But the real fight could be waiting in the wings.
With its MSN Music service that began Thursday, the software giant is challenging iTunes, which sells 70 percent of all music purchased online. On Wednesday, Apple reported that it had sold 125 million songs since its April 2003 launch.
Microsoft Corp., whose Windows software sits inside 97 percent of the world's computers, hopes its new music venture can enjoy similar success and make a dent in Apple's hegemony, something other rivals have been unable to do.
Apple rose to its new challenger, issuing a feisty statement: "Compared to iTunes, Microsoft's music store currently offers only half the songs and is missing many features, but its biggest problem may be that its downloaded songs do not play on iPod, iPod mini, or the Apple iPod from HP -- the world's most popular digital music players with over 50 percent market share."
But within the still-developing digital music industry, some question if the market dominance enjoyed by Apple and perhaps Microsoft can last more than a few years.
Both Apple and Windows base their online businesses on a pay-per-download model: Songs cost 99 cents each; most albums are $9.99. This year, the online sector should account for about 2 percent of all music sales, with estimates of total revenue running from $270 million to $500 million, according to industry figures.
Some analysts, however, believe the real money to be made will come from subscription services, which now lag behind the download stores in total sales. The reason has to do with the way people buy and use music.
With download services such as iTunes, users can hear a 30-second sample of a song before they buy it. Once they buy it, it stays on their computer or can be transferred to an MP3 player or burned onto a CD. (Songs purchased from iTunes can be played only on an iPod. Songs bought from MSN Music can be played on any of the nearly 100 MP3 devices for sale.)
The subscription model resembles how people watch cable TV. Services such as Napster, which charges $9.95 a month, give users the right to listen to the entire length of all the songs in the service's library an unlimited number of times. They typically hook up their computer to speakers or run the songs through their existing stereo systems.
If the subscribers choose to buy and burn the song, there is an additional charge.
A July report from Jupiter Research predicts that download services will account for $158 million in revenue this year, with subscription services taking in $113 million. According to the company's forecasts, both numbers will continue to grow in coming years, eventually will converge and will switch places by 2008, when subscription services will book an estimated $741 million in revenue, passing the $713 million in sales that download services will make.
IDC Research, in a June report, is less bullish on subscription services but sees them pulling nearly alongside download services by 2008, with $1.1 billion in revenue compared with $1.3 billion for download services. By then, digital music sales should account for about 12 percent of all music sold, analysts estimate.
The reason for the coming surge in subscription revenue, said Jupiter analyst David Card, has to do with which music consumers spend the most money.
"Downloads appear to us to be a sampling medium," Card said. "We think subscription services appeal to the heavy spender."
As many as half of all Americans spend no money on music, Card said. "They just listen to the radio," he said.
About 25 percent of Americans spend more than $250 per year on music. Those customers are the audiophiles, customers who are "very eclectic and like to hear new stuff," he said. Those people are prime customers for the subscription services that let users listen to an entire library of songs all the time, he said.
To emphasize his point, Card pointed out if all the iPods sold are divided into all the songs sold on iTunes, the total comes to an average of 34 songs per iPod, or about $34 spent on digital music. In other words, the numbers indicate that the average iPod owner is a sampler, rather than a heavy spender.
Should Apple begin offering the option of a subscription service or risk becoming the Gorbachev of the online music business -- the pioneer who eventually gets trampled by his own revolution?
It's not a worry Apple seems to have. The company has not spoken about adding a subscription service, spokeswoman Natalie Kerris said yesterday, pointing to the unrivaled success of its current model. Though, she added, Apple has a policy of not commenting on possible developments.
Yesterday, Microsoft said it is considering adding a subscription element to MSN Music.
For subscription services such as Napster and RealRhapsody, the entrance of Microsoft into its business space might have the same "Oh no!" factor as an art-house theater owner looking out the front window and seeing the sign, "Coming Soon: 40-Screen Multiplex."
But Rob Glaser, chairman of RealNetworks, which owns RealRhapsody, takes comfort in the analogy he draws between his business and cable television.
"Subscriptions are a powerful business long term," he said. "Subscription businesses in general will start out more slowly because there's more of a commitment involved. But then it's like a snowball rolling downhill."
Subscription services do face some obstacles. Apple's sleek, minimalist design and hip, saturation-level ad campaign have helped make the iPod and iTunes service the frontrunner. Both Real and Napster acknowledge their systems are tougher to explain to consumers than download businesses. Also, download businesses are more favored by record companies, which promote them heavily. When a digital song sells for 99 cents, record companies get about 70 to 85 cents, with most of the rest going to the artist. But record companies typically split revenue gained from subscription services 50-50 with the artist, owing to the way digital subscription revenue is covered in artists' contracts, according to an industry source.
RealRhapsody has 550,000 subscribers. It added 100,000 per quarter over the past year and claimed the most of any service. Customers pay $9.95 per month to listen to the service's 725,000 songs and 79 cents each to burn the songs onto CD. The average customer listens to 200 songs per month and buys five, Glaser said.
Napster, which also has a download service called Napster Lite, will not disclose how many subscribers it has, but chief executive Chris Gorog said his subscription-based business can withstand competition from Microsoft.
"Both Sony and Wal-Mart entered this market in the last six months," he said. "We were advised we should be very concerned about that but our market share has not moved one inch."
The profit margin per user is higher for subscription services than download services, and about 65 percent of Napster's revenue comes from subscribers, the company's financial reports say. In contrast, Apple's iTunes is not expected to be profitable; it is primarily a marketing tool to propel sales of iPods, which run as high as $399.
Though they are rivals in song-selling, Napster is licensing a new Microsoft software called Janus that Gorog calls "the Holy Grail."
In coming months, Janus will allow customers of subscription services to transfer all their songs onto an MP3 player, unchaining them from the PC.
Because the subscription services essentially work as a rental model, if customers do not renew their subscriptions, the songs disappear from the MP3 player. But in the meantime, the songs are portable.
"They can move 10,000 songs to their favorite MP3 player without paying 99 cents a song," Gorog said. "If that were iTunes, it would cost $10,000."