RealTime IT News

Online Music Singing the Contraction Blues

What was once a minor buzz about strategic moves in the online music sector is now hitting a crescendo over whether a shakeout is looming and which companies will be left with all the chips.

With the bigger players -- Microsoft , AOL , RealNetworks , Apple and Sony Music -- all putting their cards on the table, the hedge-betting has set tongues wagging about possible acquisition deals coming down the pike.

RealNetworks set the train in motion with its minority investment in Listen.com, which runs Rhapsody, a competitor to Real's own MusicNet. Within days, Pressplay backer Sony acquired a minority interest in MusicNet, a clear sign of things to come.

RealNetworks declined details on its Listen.com investment but well-placed sources tell internetnews.com the cash-for-equity transaction included an option for Real to buy the company outright and analysts expect that deal to be the first in a series of acquisitions that will leave the fee-based music services in the hands of a select few.

Greg Lee, research associate at Raymond James & Associates, is impressed with Listen.com's Rhapsody service, which offers custom radio stations for $4.95 per month and a $9.95 monthly plan that allows unlimited streams and access to burn songs for 99 cents. Yet, despite being what he described as a "top-shelf service," Lee doesn't believe Rhapsody can survive the inevitable shakeout.

'Forget the service, it's about marketing'
"This business is about marketing. Getting the content and the licenses has become easier and easier but, unless you have that marketing power of an AOL or an MSN, it's really tough to companies like Listen.com and FullAudio," Lee explained.

Like Listen.com, FullAudio has integrated a strong radio hook in its revamped MusicNow service, which hawks unlimited tethered downloads and streamed songs for $9.95 per month.

For Chicago-based FullAudio, the likely buyer would be Microsoft, a company it already has a tight relationship with. Once RealNetworks uses its buyout option on Listen.com, industry watchers say Microsoft will then acquire FullAudio. Pressplay, which is co-owned by Sony and Universal and had distribution deals with Microsoft and Yahoo would remain a competitor.

That scenario would leave MusicNet in the hands of AOL and Sony; Listen.com as a RealNetworks subsidiary, FullAudio as a Microsoft-owned entity and Pressplay as a Sony/Universal initiative. All would have the five major record labels (including Sony) as minority stakeholders.

Confused yet? Right, that's exactly the state of play until all the hedging of bets plays itself out, analysts explained.

FullAudio chief executive Scott Kauffman declined to comment on the likelihood of Microsoft gobbling up his company. "We're a venture-backed company and our job is to build asset value for our investors. We're ten days into launching a new service and that's our priority. As we start to build a roster of consumers who first sign up and then renew their membership, we'll create a very attractive business," Kauffman told internetnews.com

But, because FullAudio's MusicNow service is exclusive to Microsoft Windows Media Player, and with the software giant's public mission to turn the Windows XP operating system into a full-scale multimedia entertainment platform, it's a logical bet FullAudio is already being courted by Microsoft.

'Contraction is inevitable'
Jupiter Research digital music analyst Lee Black agrees contraction is inevitable. "Can Listen.com or FullAudio survive for another year? No. They need to have that powerful distribution arm. They both have compelling features and they're both selling at an acceptable price range but it has not quite panned out because they don't have that portal backing," Black said.

"The struggle is to sign up customers. They already have the licenses and the technology infrastructure. The struggle to get customers will be tough without a portal partnership. Portals come with a huge amount of traffic and loyalty. And, portals come with integrated billing, which is crucial," he added.

Raymond James & Associates' Lee agreed. "If the product is great and no one knows about it, it'll eventually fade away. They really can't compete with MusicNet and Pressplay, which are marketed on AOL and MSN. If AOL is running advertisements throughout their network and put a big ad on the AOL main page for MusicNet, how can Rhapsody or FullAudio compete with that?," He argued. "They (AOL) have the money to subsidize with free trials for a while so that's tough to beat. That's why I believe contraction is inevitable."

FullAudio's Kauffman dismissed any suggestion that his MusicNow service is devoid of any marketing muscle, pointing out its close association with Microsoft's WMP as one area where the service has a big-name outlet. "We market through channel partners, Microsoft being one of them. We have all the marketing muscle of those channel partners, including EarthLink," he said. FullAudio provides the backend technology that powers EarthLink's digital music service.

"Our marketing costs, in many respects, are shared with our channel partners," he explained.

Lee is unconvinced FullAudio can survive the shakeout. "My estimate is, a year from now, we'll see everything being centralized. There will be about three or four big music services, all owned by the bigger companies," Lee said. Even the new entrants to the market, like Apple with its planned service for Mac users, will be brand-name firms with a built-in marketing arm.

"Apple is in an unique position. They have a rabid fan base of Mac users who will purchase their music subscriptions just because it has the Apple brand," Yankee Group analyst Ryan Jones said in a recent interview.

Even Roxio Inc., which is planning a legitimate comeback for the Napster brand, already has a user base available with which to market the service. The company is a big player in the CD and DVD burning software market, and would build a marketing plan marrying software to services.

Don't rule out Roxio from the buying spree, Greg Lee warned. "It's a possibility that Roxio will be busy on the acquisition front. They can slap the Napster name on any of the existing services and create something big. The Napster brand is very valuable. It's a name people associate with music downloads," he added.

"Roxio has a decent amount of cash on hand. If they really intend to get a service out there, they would acquire someone just to get the necessary licensing deals."