Original URL: http://www.theregister.co.uk/2004/12/24/digital_music_in_2004/

Downloading digital music

Majors and minors, players and platforms, lawsuits and licences

By Tony Smith

Posted in Media, 24th December 2004 15:01 GMT

2004 in review It wasn't quite the 'Year of Digital Music', but 2004 certainly paved the way for 2005 to take that title.

In the UK, Apple and Napster both opened online music services, with the iTunes Music Store also making an appearance in France, Germany and, later in the year, in a number of other European states. Sony, too, targeted the UK and Germany with its Connect service, though it came a month later than its rivals, offered fewer songs and was widely criticised for its poor jukebox software, particularly in comparison with Apple's iTunes.

Sony Connect had made its US debut a few months previously. In September, it was joined by Virgin Digital, which had announced its plan to launch in the US in April. Richard Branson's company also said it was preparing to set up shop in the UK, but so far there's been little sign of when that will be. Part of the problem may be the company's existing UK download supply deal with European digital music pioneer OD2.

OD2 has been selling digital music through online retailers, music-related websites and ISPs, including Virgin, HMV, MTV Europe, Tiscali and others, since 2003. In the summer of 2004, however, it was bought by US digital content distributor Loudeye for $40.5m. Yahoo!, meanwhile, acquired Musicmatch. Loudeye's latest financial results show the purchase has improved the company's revenue by a couple of million bucks, not quite doubling it, yet still widened its loss.

OD2/Loudeye's example showed just how much digital music companies need to promote their offerings actively to the market. Apple has proved the master here, primarily through its iPod marketing campaign, which has encouraged sales of hardware that ultimately drive content sales. Other companies, without such a lure, had fared less well, though Napster entered into a string of alliances to push its song vouchers into the mainstream.

Hangin' on the Telephone

Hardware is crucial, and will continue to drive the digital music market in 2005. Apple will, with Motorola, unveil an iTunes-enabled mobile phone during the first half of the year, possibly as early as January. The deal was announced back in July, but soon after Loudeye partnered with Nokia to promote its music service to network operators. Microsoft made noises about the phone business too, equipping its Windows Mobile 2003 Second Edition software for PocketPCs and smart phones with a version of its latest Windows Media platform.

WM10 introduced a new level of DRM, allowing players to be loaded with subscription-sold songs. Napster quickly launched Napster-to-Go on the back of it, but so far it's shown little benefit. MS hopes its PlaysForSure scheme will have more success in the coming year.

Perfect Harmony?

DRM compatibility got Apple and Real Networks into a shouting match over the latter's launch of Harmony, a DRM conversion too, translating Real's Helix DRM technology into Apple's FairPlay DRM rules, effectively allowing Real's Rhapsody music service to sell songs to iPod customers. Apple cried foul, and threatened to tweak the iPod firmware to spoil the trick. Real pledged to continue to develop Harmony to cope with such changes.

It's arguably made little difference in any case. There's no indication that Harmony has increased adoption of Rhapsody. Real had more luck by slashing song prices for a time. iPod owners remain happy to buy only from the iTunes Music Store, showing that it really is hardware that's leading the download market. That will eventually change, but nothing Apple has done to date will preclude it from opening both the iPod and iTunes to other formats and music stores when the need arises.

Not only is that a long way off, but so too is the point at which downloads seriously impact physical media sales. Statistics released through the year showed that CD sales remain strong, while downloads account for a tiny percentage of the market. That's one reason why Apple UK's initial unwillingness to sell the new Band Aid 20 single, because it and supplier Universal Music could not agree on a price, will have had little effect on the single's sales. The two eventually reached a compromise: Apple would sell the song for £0.79, but Universal would receive the £1.49 it was asking for, and which every other music provider was charging. Apple made up the difference out of its own pocket, a move just adopted by UK service Wippit, which is selling the song for £0.49.

Wippit had a good year. It signed up all the major labels to the download service it added to its existing subscription-based, P2P-like service, and even struck a deal with easyGroup to power the airline-to-Internet cafés empire's low-cost digital music service. It went live this week, just after bricks'n'mortar music retailer HMV announced it plans to spend £10m refreshing its download service in 2005.

Altogether now, altogether now

By then it may be up against Virgin Digital's UK service, also pursuing the same Windows Media-oriented market. In addition to Napster, a number of smaller services launched in the UK this year, including Recordstore, Mean Fiddler and... er... Oxfam, all building services around Microsoft's software. As did UK retail giants Tesco and Woolworths. In the States, Wal-Mart got in on the act.

There's no doubt devices like Creative's Zen Micro, and iRiver's H10 and H300 series, will widen demand for WMA tracks, but it's going to take a lot to slow Apple's momentum. While Apple sells on what is effectively an exclusive basis to iPod owners, all the other services will be battling each other for the WMA market. If Apple ships a Flash-based iPod as anticipated, then it's going to be harder to derail it.

More the merrier

And no other vendor has embraced the add-on market in the way Apple has. It's addition of the dock connector to the iPod line has paved the way for a raft of after-market products from both computing accessory specialists like Belkin, MacAlly and Griffin, through audio experts like Bose, Harmon Kardon and Altec Lansing, to the likes of Burberry and Gucci. No other MP3 player vendor has seen such a business ecosystem accrete around its products. Quite apart from making the iPod expandable and thus more attractive, it helps tie buyers to the platform.

Attracting users hasn't proved a problem for the P2P services, despite the Recording Industry Ass. of America's aggressive legal campaign against file-sharers, which has targeted over 7000 named and unnamed individuals to date. Its equivalent in the movie business, the Motion Picture Ass. of America (MPAA) belatedly began a similar move, pursuing not only P2P users but people distributing unauthorised movie copies <a href="/2004/12/14/mpaa_vs_bittorrent/"using BitTorrent.

Kazaa crisis

Both the MPAA and the RIAA took their complaint against P2P software developers to the US Supreme Court, having this year lost an appeal against a 2003 District Court ruling that stated Grokster, Kazaa and co. were not liable for the actions of their users. Kazaa owner Sharman Networks finally went on trial in Australia, accused of contributing to copyright infringement. Repeatedly delayed throughout the year, the trial arose from a series of information-seizing raids that took place in February. The trial is over, but the verdict has yet to be announced.

As if in preparation, P2P companies began to consider alternative business models that would raise the reputation above the situation where they're synonymous with online music piracy. Grokster, for example, began talks with Sony about setting up a licensed, monitored file-sharing network. The service, Matchboxxx, is expected to be powered by Snocap, Napster-creator Shawn Fanning's attempt to build a P2P world where copyrights are maintained, artists get their due, labels take their cut, but users can download and share files will abandon. Fanning kicked off the scheme by signing a licensing deal with Universal.

Look to the future now, it's only just begun

Digital downloads are here to stay, and 2005 will be characterised by more, bigger attempts to get mainstream buyers as well as natural P2P users to pay for downloading songs. Apple's vertical model - own the hardware and the content supplier - is likely to remain pre-eminent, but only while it's the hardware that leads the business. Microsoft's PlaysForSure scheme may be able to unite disparate hardware vendors and content sellers into a whole that has the synergy of iPod and iTunes, but it seems unlikely. In Europe, losing the right to bundle Windows Media Player 10 with the OS may cost MS dear.

That said, the weight of WMA-based services, many from strong music-related brands, may cause the balance to shift from hardware to content. And the effect of video remains unclear: will video devices wrest consumers' attention away from the iPod next Christmas? Or are portable media centres to become little more than the pocket TV of the 21st Century?

We shall see, gentle reader, we shall see... ®