DIGITAL MUSIC: 220,000 track mind

OD2 co-founder Charles Grimsdale informs Charlotte Goddard he isn't fazed by new competition in a market that the digital download service has made its own since 2000.

The internet is alive with the sound of music. The sheer amount of activity in the download market makes other digital sectors - even the hotly contested search space - look positively slack. Convinced that 2004 will be the year of the paid-for, legal, music download service, firms like HMV, the Woolworths Group, AOL, Apple, MSN, Tiscali, and even the newly relaunched one-time industry pariah Napster are struggling to grab a piece of this very attractive pie.

AOL says it hopes to introduce a European music download service in the spring next year, but it lacks a timeframe. Real Networks is aiming to roll out its Rhapsody service in Europe in the second quarter of 2004.

HMV is planning to launch its own service and Apple is eyeing up the European market. The Woolworth's Group launched a beta service through its subsidiaries, Streets Online and Entertainment UK, in November. But, most of the existing digital download e-commerce products in the UK, including HMV's current service, are all powered by just one firm - On Demand Distribution (OD2).

The company provides download services for MSN, Freeserve, Tiscali, HMV, dot-music (owned by Yahoo!) and Virgin Downloads in the UK, and has partners elsewhere in Europe.

Charles Grimsdale, co-founder of OD2 alongside musician Peter Gabriel, is not phased by the prospect of competition in a market which the firm has made its own since launching in 2000. "Competition is always healthy and it will develop general consumer awareness of the sector. We've got some strong distribution partners and very good regional coverage."

When Grimsdale founded OD2, he thought he would be developing a service that would be used mainly by independent record labels. "We reasoned that most major record labels would want to do this themselves, but it transpired they didn't have the infrastructure in place," he says. The labels tried to develop their own services, with Sony Music Entertainment and Vivendi's Universal Music Group developing PressPlay, and EMI Recorded Music, Bertelsmann's BMG Entertainment and AOL Time Warner backing MusicNet.

Yet, Pressplay is now out of the hands of the labels. CD and DVD technology firm Roxio acquired Pressplay for $12.5 million (£7.37m) in cash and about 3.9 million shares of Roxio common stock in May and used it as the basis to relaunch Napster. And MusicNet is only available to AOL users.

"The labels figured out that it just doesn't make any sense for them to sell direct online, just as they don't sell direct on the high street," says Rafat Ali, editor of payment resource site Paid Content (www.paidcontent.org).

"A third party can put on layers like usability, packaging, branding and portability. Selling music online is not an easy thing and it is best left to the experts."

OD2 has deals with some 60 record labels, including the five majors, and holds around 220,000 tracks. "We have close to a million tracks licensed, but they are not all live yet," claims Grimsdale. It receives commission for every track sold through its distribution partners, who can set their own prices.

In August, OD2 joined up with Microsoft to launch a new version of its music platform, which can be accessed through Microsoft Windows Media Player 9, Microsoft's downloadable software that enables users to listen to music and watch videos on their computers. The deal means people who have downloaded the Microsoft software can access OD2's range of tracks direct through the application, and use its search-and-browse tools to manage their music library. This service powers the MSN Music Club, opened in the summer, and Tiscali Music Club, launched in November.

Tracks and albums can be purchased on a pay-as-you-go basis, starting at 99 cents (75p) for a track and 12.49 euros (£7.99) for an album. Alternatively, users can subscribe to either club, which brings the cost of a track down to 82 cents (62p). They can also choose to stream tracks from the web, which is the equivalent of creating your own personalised radio station - you can listen to a track, but you won't 'own' it - and that costs around 1p per track.

Grimsdale refers to MSN and Tiscali's Music Clubs as "the second generation of online music stores in Europe" because consumers don't have to pay a subscription. "Prior to the beginning of August, the only service on offer was subscription-based. People had to pay a regular monthly or annual fee, and couldn't buy individual records," he says. "Now, there is the choice to subscribe and receive a discount or pay as you go."

"The pay-as-you-go offering provides an even simpler way of buying digital music," comments Amanda Anthony, business marketing manager at MSN. "We are convinced that, just like in the mobile industry, this payment option will attract a different profile of user to the web site."

European legal, music download services have previously been hampered by the need to secure separate licensing agreements for individual countries, something which Paid-Content's Ali believes has put off US digital-download firms. "Most US firms want to run services that cover the whole of Europe and the biggest hurdle has been the different licensing schemes across Europe," says Ali. "The licensing environment has been pretty confused across Europe," agrees Grimsdale. "When we started three years ago, those licences didn't exist."

However, the IFPI, the international organisation representing the recording industry, has taken a step towards simplifying the problem. In November, it announced a new global agreement that will enable companies to stream music to consumers on the basis of a single one-stop licence. This will allow companies to clear record producers' rights across a range of countries by getting a licence in one participating country.

"This means that someone like AOL or Apple could come in and get a licence which covers a number of countries in Europe just by getting one from the UK, for example," explains Ali. "That changes things quite a bit and will drive the launch of online music services over the next year."

Jay Berman, chairman and chief executive of IFPI, believes: "This is another milestone in the development of online music services. In the past, setting up web-casting licences in multiple countries, for example across Europe, has been an arduous and time-consuming task," he adds.

"It was important for our collecting societies to set up a system that would remove these hurdles. It will be much easier for these companies to operate across borders, and we expect to see web-casting gain momentum as a result of this agreement."

However, it is not just the issue of licensing that is a hurdle to the development of pan-European services - it is also the language differences and the variations in music appreciation between countries. OD2 believes its regional coverage, which is available in 10 European countries in nine languages, gives it a competitive edge that will help it stand up to potential newcomers such as Apple, AOL and Napster.

The third obstacle to the development of paid-for, legal services is one which Europe has in common with the US and indeed the rest of the world - the continuing presence of free peer-to-peer download sites. Although Napster has reinvented itself as a paid-for service, other web sites, such as West Indies-based Grokster (www.grokster.com) and Kazaa (www.kazaa.com), owned by Sharman Networks, continue to offer free downloadable peer-to-peer technology, which enables users to share tracks, as well as images, video and document files. The firms say they are not breaching the rights of the copyright holders, but merely providing people with file-sharing technology.

"There is always going to be illegal copying, some small-scale, some large-scale," believes Grimsdale. "But, definitely, the feedback we are receiving suggests that users are prepared to pay for music tracks, and the number who are prepared to do so is growing rapidly."

With so many new and planned launches, the question of how these companies are going to differentiate themselves from the competition is becoming pertinent. Will consumers choose to download their tracks from an ISP like Tiscali or AOL, a retailer like Virgin Megastore or HMV, or a technology company like Apple? Will music download services stand or fall by price, brand, functionality or range, or something altogether different? "It's a combination of brand and functionality," suggests Grimsdale. "Apple has a fairly loyal following, for example, and the ipod and Mac users will probably tend to gravitate towards iTunes. Price will be less significant."

Entertainment UK (EUK), owned by the Woolworths Group, launched a beta-download service in November in partnership with sister company Streets Online (www.streetsonline.co.uk/digital). EUK's head of digital, Paul Zimmerman, says the service differentiates itself by the integration opportunities it offers. "The digital offering is integrated into the physical offering, so if a visitor searches for REM's songs they will be given the opportunity to buy downloads or CDs," he says. Stuart Rowe, e-commerce director at HMV Europe, believes integration is also the strength of his company's digital-download service. "As an established high-street brand, we can integrate our web site with our stores, and our 185 outlets are a huge asset in promoting our web site. But, we also integrate the download service into the main site with a download button on the main menu." Rowe is confident that the UK digital download sector faces little threat from companies in the US. "I don't believe that one of those American firms has a single employee in the UK as yet," he adds.

Although there is clearly a demand for digital music, companies launching in this area are not all viewing it as simply a revenue-generating tool or even, in some cases, a money generator at all. Steve Jobs, chief executive of Apple, was reported as saying that the company views its online music download service iTunes as a marketing tool for its iPod mobile music device. Roxio, the new owner of Napster, is a company that provides CD-burning technology, so it has both up-selling and cross-selling opportunities as well.

On the other hand, ISPs such as Tiscali view music download services as an essential part of their overall content offerings, particularly in the broadband era. "If we don't offer music to our users, they will go elsewhere," points out Neal McCleave, general manager of media and operations, at Tiscali UK. "We have a captive audience in the form of a large and growing member base and we will promote our new music club alongside the rest of our content offerings."

Tiscali had a previous music offering, but, says McCleave, it suffered from its somewhat confusing range of options and prices, as did other online offerings. "We were guilty of a number of things that have hampered the development of the industry as a whole," suggests McCleave. "The pricing was not as compelling as it could have been, compared to retail. You had to subscribe before you could buy any tracks and the model was confusing." Now, McCleave believes that the environment is just right for the online music sector to explode.

"Broadband's faster connection speeds make downloading easier, the development of mobile devices such as the iPod means that you can carry your music with you, and I think we will start to see tremendous growth in this area," McCleave predicts. And Grimsdale agrees: "We are not seeing any signs that growth in the online music sector is slowing down."

Although Europe is, to a certain extent, following the lead of the US when it comes to digital downloading from the internet, mobile music is likely to take off over here first, according to Ali. "With mobile music, we are seeing the same thing happening with the labels as happened online," says Ali. "They want to eliminate the middleman and cut deals with the telecoms companies themselves. But, in two years or so, the labels will move out and we will see a middleman like Apple or Vodafone or some other company taking over. Whatever happens," he concludes, "it's going to be huge."

A BRIEF HISTORY OF MUSIC DOWNLOADS

1999: File-sharing service Napster launches, allowing internet users to swap music tracks for free. The record labels and the Recording Industry Association of America (RIAA) are incensed

2000: Napster teeters on the brink as it is first ordered to shut down by a US judge after being taken to court by the RIAA but then receives a last-minute reprieve. OD2 launches in the UK

2001: Media delivery company RealNetworks launches download web site MusicNet in the US with minority stakes held by music giants EMI, BMG and Warner Music. Media group Vivendi Universal buys MP3.com for $372 million (£258m) and launches it in Europe. Tiscali launches subscription-based download service through OD2. Napster finally closes its doors

2002: Sony Music Entertainment and Vivendi Universal's Universal Music Group launch PressPlay. MSN UK launches its first download service through OD2. The first 'digital download day' is launched in the UK, spearheaded by OD2

2003: MP3.com closes its European operations, resulting in the loss of 20 jobs. Internet media firm CNET buys MP3.com's assets. A raft of paid-for download services open their doors, including iTunes and Rhapsody. CD/DVD technology firm Roxio buys PressPlay and relaunches Napster, which it bought in 2002, as a paid-for service. The RIAA issues 261 lawsuits against individuals alleged to have illegally traded music files over the internet.

APPLE TAKES 80 PER CENT OF LEGAL MUSIC DOWNLOAD MARKET

Apple launched its iTunes Music Store in the US in April for the Mac and in October for Windows. Users simply download the software from Apple's site and pay 99 cents per track, which they can burn onto an unlimited number of CDs, transfer to an unlimited number of iPods, and play on up to three computers.

Users, who must have a valid credit card with a US billing address, can search by title, artist or album, or browse by genre, artist and album.

They can listen to a free 30-second preview of a track before buying. An 'Allowance' feature gives parents the ability to deposit money into their kids' iTunes accounts every month and users can even purchase gift vouchers.

Apple claimed in November that more than 17 million songs had been purchased and downloaded from its iTunes Music Store since it launched. According to Nielsen SoundScan, an information system which tracks sales of music and music videos in the US and Canada, the music store had more than 80 per cent market share of legally purchased downloads in the first week of November.

Apple is also partnering with Pepsi-Cola North America. The drinks firm plans to launch an online music promotion in February 2004, which will involve placing codes on bottles of Pepsi, Diet Pepsi and Sierra Mist.

Winners will be able to redeem the code for a free song from the iTunes Music Store.

"This historic promotion to legally give away 100 million free songs will go down in history as igniting the legal download market," says Steve Jobs, chief executive of Apple. "Pepsi has marketed its products using music for generations and this is going to be another promotion that is remembered for decades."

THE ONLINE MUSIC INDUSTRY PLAYERS

- ITunes

(www.apple.com/itunes)

Owner: Apple

Tracks: more than 400,000

Cost: 99 cents (47p) per track, no subscription fees

In Europe? Plans to launch in Europe in 2004

- Napster 2.0

(www.napster.com)

Owner: Roxio

Tracks: 500,000

Cost: $9.95 (£5.86) per album; 99 cents (47p) per track;

subscribers can pay $9.95 per month instead to gain unlimited

streaming and downloading of songs

In Europe? No

- Entertainment UK/Streets Online

(www.streetsonline.co.uk/digital)

Owner: Woolworths Group

Tracks: n/a; still in beta

Cost: 99p a song and £7.99 an album

In Europe: UK only

- EMusic

(www.emusic.com)

Owner: Dimensional Associates

Tracks: 275,000

Cost: EMusic Basic: $9.99 (£5.89) a month/40 song

downloads; EMusic Plus: $14.99 (£8.83) a month/ 65 songs;

EMusic Premium: $19.99 (£11.78) a month/ 90 song downloads

In Europe? Had 165,000 UK users in the quarter ending March 2003,

according to Nielsen//NetRatings.

- Rhapsody

(www.listen.com)

Owner: RealNetworks

Tracks: more than 400,000

Cost: $9.95 (£5.86) per month for streamed music, 79 cents

(47p) to download a track

In Europe? Plans to launch a European service in the second quarter of

2004

- OD2

(www.ondemanddistribution.com)

Owner: On Demand Distribution; powers services which include HMV, MSN,

Tiscali and Freeserve

Tracks: 220,000

Cost: Starting at 99 cents (47p) a track and 12.49 euros (£7.99)

an album. Subscribers pay just 82 cents (£0.62) for one track

In Europe? Yes

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