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Doubts Loom Over MySpace Music Strategy

With the backing of four major music labels and an existing user base that has already demonstrated an interest in listening to music online, MySpace has mounted the most credible threat yet to Apple's dominance of the digital music business.

The greatest impact of MySpace Music, however, may be on smaller competitors in the music streaming and social networking business, according to analysts.

The MySpace Music service provides advertising-supported free music streaming, with the ability to purchase and download MP3 files of songs for use on a music player from Amazon. Users can create online playlists of their own and embed them in their MySpace home pages with MySpace's new player, or listen to playlists built by other users and celebrities. To purchase a song from the player -- available only to Windows users -- a listener can click on a "buy" button next to the song through Amazon.

MySpace's user demographic represents a key target market for the music industry. Internet users over 13 years of age who access music through social networking sites spent $70 per capita on CDs, paid downloads and music subscriptions, more than double the $25 per capita spent by those not using social networks, according to a study on digital music purchases by NPD Group.

"From a retail perspective, the impact on Apple I think will be pretty strong," said Paul Verna, senior analyst at eMarketer.com. "Apple is still very dominant in the music retail market, and I don't know that this will suddenly and drastically tip the scales. But, you do have a large community of music consumers who are now going to be driven directly to Amazon for purchases. "

Just how big of a bite that takes from Apple's iTunes download business remains to be seen, said Verna. Other analysts believe that the bite will be there, but it may largely go unnoticed.

"I still think it's going to be very difficult to unseat Apple," said Larry Witt, analyst at Morningstar. "It's more likely than not that in 5 years, Apple will still be the dominant online music retailer." Witt agrees that MySpace has the best shot at challenging Apple, because of backing from corporate parent News Corp. and its large user base.

But the real focus for MySpace is on the advertising stream rather than selling downloads. "Selling individual songs is really interesting, but this is more about making money off of ads than making money off of Amazon affiliate fees," said David Card, a senior analyst at Jupiter Research. "I think MySpace is better positioned to succeed, because they already have a large audience, a big sales force, and have relationships with advertisers already. "

MySpace spokespeople did not return requests for comment by press time.

The competitors with the most to lose are other social networking music services, such as iMeem and CBS's Last.fm. "I don't want to minimize other services like iMeem and LastFM," said Verna, "but MySpace has a huge user base, and if anyone can monetize music on an ad supported basis, MySpace is in a great position to do it. Internally, at MySpace, I think they're looking at advertising as the driver.”

Jupiter Research’s Card doesn’t think MySpace’s success necessarily means that offerings like iMeem and Last.fm won’t succeed. “I don't think we're in a winner take all environment,” he said. “It might seem that way because iTunes has so dominated the conversation about digital music up to now. Bui the reality is there's a lot of different ways that people listen to music and find new music and share it with their friends, and there are probably as many different business models out there to support those. Music is a niche business”

Still, Card admits, there’s not enough advertising money in the market to support all the services. “Nobody is currently making money off of ad supported online music other than Yahoo with Launch, and probably AOL. But I'm not counting IMeem and LastFM out right now--they have different audiences.”

The MySpace Music launch also poses a challenge to social networking provider Facebook. While Facebook offers a music-related service through application partner iLike, Verna and Card believe that Facebook will have to respond in a bigger way to MySpace to compete.

“If Facebook doesn't go into some sort of music-intense exchange or service or community, they're definitely going to be left out,” said Verna. “I would be very surprised if they don't follow through with something along similar lines.”

Facebook faces an uphill battle, said Card, because of MySpace’s long-standing music culture and its strong marketing. “There’s not a strong music thrust” at Facebook, he said, and while Facebook’s Beacon advertising platform “was very interesting, Facebook has been focused to a fault on he user instead of the marketer. You've got to be able to create marketing experiences, and deliver parts of the audience if (marketers) want that, or reach if they want that.”

Carr doesn’t see Facebook building out content channels in the way MySpace does. “Facebook is like Silicon Valley and MySpace is like Hollywood,” Card said. “MySpace is a three-and-a-quarter billion dollar business, where as Facebook is a hundred-million-dollar business.”