Tuning up for online music wars' next battle

September 02, 2004|By Mike Himowitz

SUPPOSE A company asked you to buy a computer based on how much you like its portable music player. Would you bite? For Apple, the tactic might work, and that says a lot about the state of the computer and music industries these days.

When Apple announced the third version of its iMac desktop computer this week, it boasted that the machine comes "From the creators of iPod." On the surface, that's like GM pitching a Cadillac Escalade by bragging that it's "From the creators of the turn signal."

But there's no doubt that Apple's elegant iPod portable music player -- the runaway best seller in its market among both Mac and Windows since its introduction in 2001 -- boosted the company's image for cool in a new market, helped Apple's bottom line and provided a needed shot of enthusiasm for a line of computers that was getting a bit tired.

Nor is it a coincidence that the new one-piece iMac -- a superb example of minimalist design that folds the entire guts of a powerful PC into the back of a white-bordered, flat panel screen -- looks like an iPod on steroids.

It's just another sign that a major battle for the hearts, minds and dollars of young, tech-minded consumers will be fought over music -- who sells it and who gets to play it on what portable gadgets. In this squabble, the PC is really the middleman. And with Microsoft expected to open its own online music store this week, things are likely to get even livelier.

The big players of the music industry took a gamble on Apple when they licensed their catalogs to the company's fledgling iTunes music store in April 2003. It paid off for both.

Millions of music fans demonstrated that they were willing to pay 99 cents a tune for music that was copy-protected -- but not outrageously so. Apple instantly became the "legal" online giant of the music industry. That, in turn, boosted sales of its profitable iPod -- which is not only a great music player, but the only portable music device that can play album tracks purchased through iTunes in their native format.

Although online sales now generate less than 2 percent of the music industry's U.S. sales, the record labels have generated hundreds of millions in online revenue with almost no additional cost. Much of that revenue had been lost to illegal file-trading, which the record industry blames for declining CD sales.

While online music revenue is never likely to overtake income from CD sales, it is expected to increase rapidly during the coming years as iTunes and its rivals grow in popularity. Today Apple has an estimated 70 percent share of the online market, but it already has a variety of competitors, including Napster, RealNetworks, MusicMatch, Sony and even Wal-Mart.

Against that backdrop, Microsoft's entry into the business with its MSN Music store this week is an interesting one. And one with a catch for consumers.

In order to satisfy the music industry, online stores have to sell copy-protected music. So the open MP3 format that most music fans use to create digital music files from their CDs -- and that pirates trade online -- is strictly verboten for legal online sales.

As a result, the digital music files consumers buy can be played only on "licensed" PCs or portable hardware that recognize their format.

Although its own music sales will barely budge Microsoft's balance sheet, they will give the company leverage to promote the latest version of Windows Media Player, the program that plays music movies on Windows-based computers.

Microsoft wants its Windows Media format for storing and protecting music and video files to become the industry standard, just as it wants to control everything else that happens on consumers' computers. So it has to extend that reach off the desktop to a variety of playback devices, including portable music players.

Meanwhile Apple has declined to license its FairPlay copy-protection scheme to other services. Until recently, no other online company's protected music files would play on the popular iPod.

But last month, RealNetworks announced software that will allow its downloaded tunes to play on Apple's popular device. To make sure everyone paid attention, it launched an online sale, pricing its music at 49 cents a track -- half as much as Apple and most other competitors charge.

Apple has not taken kindly to this affront. It has vaguely suggested that RealNetworks is poaching on its copyrights -- and even if it decides not to risk a legal challenge, it could just change its iPod software to render RealNetworks' music unplayable on the iPod.

In any case, thanks to copy protection schemes, users who buy online music today can play the files on their own PCs and usually one or two others at home or the office. They can't be played on "unlicensed" computers, which makes the files worthless to illegal file traders.

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