Web sales of songs threaten big labels

More singles are bought online than albums, industry's moneymaker


A year after Apple Computer Inc. launched its iTunes Music Service, the online music industry is selling songs by the millions - and that may not bode well for the major record labels.

Online services account for a fraction of overall music sales, but they're growing rapidly. And the new choices they give consumers threaten to remix the recording industry's traditional revenue streams, pumping up the volume of singles and subscriptions and turning down album sales.

Customers at three of the leading online services - iTunes, Musicmatch Inc.'s Musicmatch Downloads and RealNetworks Inc.'s Rhapsody - buy about 10 times as many singles as they do albums. Offline, people buy 50 times more CDs than singles.

The shift to online shopping could be lucrative for the music industry if the flexibility and convenience lead more people to spend more on tunes than they do today. But some industry executives and analysts fear that the singles trend could accelerate, with music lovers passing up $15 CDs in favor of the one or two 99-cent songs they heard on the radio.

And, some industry veterans worry that moving to a singles-oriented business could lead to fundamental problems for artists and labels.

"There's no money to be made from singles," said entertainment attorney Gary Stiffelman, whose clients include rapper Eminem. "Unless you can sell an album you can't really afford to launch the artists. The whole economics are driven by some sort of critical mass of product."

But the new distribution system of the Internet is changing demand. As it is, individual songs from virtually every album are available for illegal downloading through unauthorized file-sharing networks. Now people can buy tracks and play unlimited songs from authorized online jukeboxes, too.

The authorized services' growth over the last six months didn't seem to hurt offline CD sales, which have rebounded about 8 percent from last year, after a lengthy slide blamed largely on illegal downloading.

The online music business dates to the mid-1990s, when a handful of technology companies developed ways to sell downloadable songs. The first few waves of start-ups crashed and burned, largely because of onerous restrictions and high prices imposed by the major record companies.

In the meantime, online music piracy exploded. Dozens of free networks emerged to let people copy songs from one another's computers, drawing an estimated 63 million users in the United States alone by mid-2003.

The first breakthrough for commercial services came a year ago last Wednesday, when Apple launched the iTunes Music Store. Pressed by Apple Chief Executive Officer Steven P. Jobs, the major labels enabled Apple to make a significantly simple and attractive offer to customers: 99 cents per song, with no real limits on CD burning or transfers to Apple's iPod portable music players. Apple said the service sold its 50 millionth song on March 15.

Since the debut of iTunes, a rival business model - selling subscriptions that let customers play unlimited songs or specialized radio stations on their computers - has carved out a foothold. RealNetworks reported 450,000 subscribers as of March 31, up 80 percent in six months. Add in MusicNet on AOL, MusicMatch's premium radio services and other online subscriptions and the total approaches 1 million.

Some online music companies continue to struggle, but the sector is growing fast and steadily. Analysts estimate that the services' revenue will grow from about $65 million last year to $250 million in 2004, with $120 million or more from downloadable singles and the rest from subscriptions.

CD sales totaled $11.2 billion in the United States last year.

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