Original URL: http://www.theregister.co.uk/2004/10/19/msn_music_npd/

Microsoft moves in on music downloads

No Apple turnover, this time

By Faultline

Posted in Financial News, 19th October 2004 10:58 GMT

Analysis The press say this is Microsoft IBM all over again from the 1980s with only one result possible. We're not so sure.

Everything that happened in online music seems to be related this week, starting with Apple owning up to an astonishing 2m iPod sales in its last quarter in the results it launched last week. The results were enough to catapult Apple's stock market value from $15bn to $17.8bn, a 17.5 per cent increase in just a couple of days trading. A year ago Apple was hovering around $8.8bn in value and it has now more than doubled this.

The stranglehold it has on this market is now what analysts everywhere are debating, as multiple offerings came out this week and the long awaited Microsoft response with its MSN music service finally saw the light of day.

Apple accompanied the results by saying that it has now sold 150 million song downloads and is now on an annual run rate of 200m songs. US researcher the NPD Group has issued a report this week saying that Apple iTunes is delivering 70 per cent of all music downloads.

This compares with Napster, which accounted for 11 per cent, and RealNetworks, Musicmatch and WalMart, each with a six per cent share.

But that's not all that NPD is saying this week. It turns out that it has tracked the gradual reduction in the use of MP3 files. We suppose that this was inevitable as companies like Apple, Microsoft, RealNetworks and Sony all push their own music formats when they sell music online. However all of these support MP3 files as well because it remains 72 per cent of all music on PCs, says NPD, down from 82 per cent a year ago.

Hard-drive share

"People are still getting MP3s and putting them on hard drives but are deleting them at a rate faster than they're acquiring them," said NPD's MusicWatch Digital.

NPD says that so far the big winners have been the formats backed by Microsoft and Apple, each of which has gained about five per cent 'hard-drive share' in the past year. The project surveys the hard-drive contents of 40,000 different people through an online panel in the US only.

NPD researchers estimate that there was a net loss of about 742m MP3 files from US hard drives between August 2003 and July 2004, despite people acquiring billions of songs from file-trading networks and their own CDs. The number of consumers paying for downloads reached a peak of 1.3m in April 2004 and since then, NPD says, the number has actually been going down, and is now at just 1m users per month.

NPD said that this downturn coincides with the end of promotional periods offered by several of the online services, in which consumers were offered trial price incentives.

All of which means that there is still an awful lot to achieve in online music services, and the feeling that NPD tries to give is that about half of the new files have been Windows Media, and half Apple's AAC. The interpretation that could be put on that is that Microsoft and Apple are running neck and neck. Which is of course not true as Microsoft has only just switched its service on.

What has been happening is that most competitors to Apple are smaller, less well-funded and less well-thought out efforts. When that's the case you have to take the hardware, DRM and software that's already available to you in order to create a new service quickly and cheaply.

So this is Apple, versus the rest (on Windows), versus piracy. And NPD would have us believe that Apple has gone so far, but may go no further.

The press has voiced a very similar story this week as Microsoft orchestrated a series of announcements designed to plant that very idea.

First off, Microsoft launched a new version of Windows XP Media Center Edition, the 2005 version, backed straight away by Dell, Gateway, HP, Toshiba and they say Sony (so far Sony's own Vaio Pocket music products run with XP, but not the media center edition).

Microsoft also added more Extender devices from HP this week and Linksys later this year, which is Microsoft's way of extending PC-held archives to be played on your television. But in truth, the jury is still out on the XP Media Center Edition; it has hardly taken off, although some analysts seem to be wavering and thinking that maybe it will do much better with this edition.

One reason that Media Center 2005 might take off are perhaps the DVR capabilities with three TV tuners in many devices and the fact that some PC manufacturers will be shipping HDTV support by the end of this year. And of course Windows Media Player 10 is bundled with this version which is the format of choice for a number of equipment suppliers trying to eat into the iPod sales.

Device manufacturers announcing new products include Creative, Dell, Gateway, HP, iRiver, Rio, Roc Digital, Samsung, Virgin, as well as handset maker Audiovox and digital media wi-fi suppliers DLink Systems, Linksys, Omnifi and Roku.

So in fact what the press have been playing up is all these combined versus Apple, and asking the question "How can Apple possibly sustain its lead?"

Microsoft's plan seems to be targeted directly at Apple, for the sake of hurting Apple, rather than for the sake of making money. On the one hand it has acted as a design focal point to stimulate all of these companies to offer hardware against Apple.

It's the music, stupid

And on the other it has also provided a route into 30 online music stores around the world through integration with Windows Media Player 10, as well as launching its own MSN Music Store. The plan seems to be that some companies can build online music stores, others can build devices, and Microsoft will make it all come together because it all uses standard software in the middle. Security is assured through the bundled DRM.

Presumably any player can be used with any online music service as long as it uses Microsoft formats. But we'd like to know who, exactly, is responsible for the customer experience? Is it the designer of the portable player hardware, the designer of the online music service or the constraints of Windows Media 10?

Steve Jobs is fond of saying things like, "It's the Music stupid," and he has a point: it begins with the quality of song and its playback, and takes in the breadth of choice, ease of use and enjoyment, and permanent ownership of a collection of music.

Many of these services that Microsoft is supporting want you to pay for a music collection every month for the rest of your life. Stop paying and your subscription service is cut off and you retain no music. These are known to be weak models and perhaps they will fail entirely on the lack of appeal of this business model. The players are attractive mostly only because of price and to a lesser extent extra storage or function. They are not however the leading brand, and they will need something dramatic to differentiate them.

And people are NOT going to buy music BECAUSE it's stored in Windows Media 10, they will need more reason than that.

In fact, in a way, Microsoft can't win. If it quashes Apple iTunes and dominates the market for its own formats, then it will have yet another illegally gained monopoly and the European Commission will be able to thumb their noses at the US Justice Department and say, "I told you so."

Microsoft paints Windows Media Player 10 as a fantastically popular piece of software saying that more than 17 million copies have been downloaded in just the first six weeks. But that has more to do with reminders from Microsoft and media player services saying that people need to upgrade their players, than from any desire on the part of consumers to upgrade to version 10 for extra features.

Microsoft has even tried, with this launch, to steal the thunder of the Digital Living Network Alliance, and has put a logo, the 'PlaysForSure' logo onto any device that offers its proprietary software.

It does this to steal the high ground, claiming that lots and lots of players work with its software, and only Apple's (with a 70% music market share) is somehow proprietary.

The entire rationale for the DLNA is to test particular implementations of standards so that new digital consumer technology applied in the home and in portable devices just works together first time. It will then be giving up its logo for proof in the same way as this PlaysForSure initiative.

Microsoft says that PlaysForSure is supported by Audiovox, Creative, D-Link Systems, Dell, HP, iRiver, Rio, Roku, Samsung Electronics and Thomson, who have all either launched a new player or put Windows Media 10 on one they already have or applied for the PlaysForSure logo, as well as by online music and video stores including CinemaNow, For Your Entertainment, MSN Music, Musicmatch, MusicNow, Napster LLC and Wal-Mart Music Downloads; and by retailers including Best Buy, Circuit City, CompUSA, Tower Records and Wal-Mart.

The idea is to isolate Apple with ownership of the market and imply that Apple is the odd one out. And we're sure, that to some extent, among some types of customers, it will work.

Apple turnover is not on the menu

The only other business that has followed the Apple line is Sony, putting out its own Pocket Vaio (and other) player, and launching its Connect service in all the territories that Apple has entered. These two are the only ones that share a philosophy, even if they still hate each other and Apple remains the original.

This week Microsoft has sponsored a huge number of new devices, and Virgin Electronics has been one of the surprise additions to the player market, announcing a 5GB player with an FM Tuner with weird dual headphone jacks for shared listening. But this just bears out the point that without Microsoft, it wasn't something that Virgin could have done; hence it had to do it Microsoft's way.

Audiovox and AT&T Wireless announced a Windows Mobile phone claimed to be the first phone to receive the PlaysForSure logo which will be the target for AT&T's mMode music service which has just been launched.

So by default, without a single customer, Microsoft has been able to position its new MSN Music as if it were the market leader, and within weeks, no doubt we will hear Microsoft indeed claiming that it is.

But the idea that Microsoft beat Apple in the PC market, and so quite naturally it can pull the same trick in the music market, is perhaps a little oversimplified. Apple has its customers already, Microsoft has yet to find its customers. Apple makes over $1bn of revenue from iPod sales, Microsoft cannot expect that money, because it's only supplying a small part of the software for the MP3 players.

Microsoft gives its media player away free (illegally in the view of the European Commission), so where does it make its money? From music sales? Well so far that only amounts to $150m, even for Apple, and most of that goes to record companies. Microsoft may have covered the Apple play, just to stop it stealing a head start in other markets, but we can tell what the US stock market thinks by the way that Apple's stock climbed over $2bn after its figures came out, while Microsoft's has stayed flat as a pancake all week.

Investors, at least, don't think that Microsoft can undo everything Apple has worked for over the past three years, in one single announcement.

Copyright © 2004, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

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