Goin' Mobile

Several developments this week gave us the best glimpse yet of how quickly digital music is going mobile – or, more specifically, cellular.

The first was a deal between major label Sony BMG and mobile phone network 3 to sell music to mobile phones. According to The Guardian, “The move is yet another attempt by an operator to persuade customers to do more with their phones than just talk and send texts. It also represents part of the industry’s efforts to turn mobile phones into digital music players and usurp gadgets such as the iPod.”

Analysts are predicting that mobile phone music downloads will overtake computer-based digital music services.

Perhaps hedging its bets, Apple is apparently set to launch a cell phone through Cingular Wireless and manufactured by Motorola that can play iTunes music, Ovum research analyst Roger Entner told the Associated Press.

It’s not known whether the new phone will allow users to download music directly over a cellular Internet connection or if users would be forced to download songs to a computer and then transfer them to the device.

As low-power, dual-core “cool” chips proliferate, there’s little doubt that mobile phones will be able to juggle the duties of an iPod and a Treo and increasing hope that their batteries can supply the energy demanded by such functionality.

Either discouraged by this trend or finally conceding its battle with the iPod, D&M Holdings, Inc., maker of Rio, the first digital music player, is getting out of the game, effective Sept. 30. D&M says the mass-market portable digital music player didn’t fit with its strategy of premium electronics brands, which include Denon, Marantz and McIntosh. Last month, it sold some mp3 player assets to chip maker SigmaTel.

The company blames the Rio for its losses, which widened to ¥717 million for the quarter ending June 30 from ¥530 million for the same quarter a year ago. Over the same period, sales fell to ¥18.75 billion from ¥19.22 billion.

Meanwhile, back on the services ranch, research firm Parks Associates released a study that concluded that 41% of people with digital music players are unwilling to pay more than $10 a month to listen to music. Yahoo charges $60 a year or $10 a month, while rivals Napster and Real Networks charge $14.95 a month.

“Companies like Yahoo! can afford to keep the price low because they have other revenue streams to subsidize their music services,” Parks analyst Harry Wang told TechWeb. “Pure-plays like Napster may not be able to lower their prices.”

Perhaps not, but, assuming Napster and Yahoo!’s music services are working on similar cost structures, I’d be curious to see how long Yahoo! would or could subsidize a business whose margins are, Wang implies, low to non-existent.

Subscription services may bear out Parks’ Parks’ $10 per month per consumer metric, but a la carte sales fall far shy of this number. Using Parks’ number, we would expect iPod owners (who account for 80% of all digital music player owners) to buy about 12 albums apiece this year on iTunes ($10/month --> 10 songs --> 1 album/month or 12 albums/year). With iPod sales at 20 million so far, that would put iTunes’ gross at $240 million for the year.

As it stands, with iTunes’ sales at $500 million since its inception, Apple has sold an average of 25 songs per iPod owner, grossing $24.75 per owner and netting $8.66 (if we assume the 65% payout to labels that iTunes was paying until last month).

Unwinding iTunes/iPod, pt. 2

This Reuters story touches on issues I addressed last month (“Should Apple open its music format”), albeit from the perspective of content owners, rather than from Apple’s.

Essentially, record labels are chafing under the lock-in between iTunes and iPod, which prevents owners of the dominant music player from playing songs downloaded from services other than iTunes.

Reuters says that Apple commands 80% of the MP3 player market and 75% of online music sales. Industry analysts doubt that iTunes can sustain that kind of dominance and label execs worry that the music service cannot, by itself, carry digital music sales to the desired 25% of overall music sales by 2009. Piper Jaffray estimates that only nine tracks are bought per month per iPod user.

So the labels want Apple to un-bundle iTunes and iPod, to level the playing field for other music services. In a sense, iPod’s dominance gives iTunes a near-monopolistic advantage over its competitors. Apple, it seems, isn’t budging.

“It's a monologue with them,” Reuters quotes one unnamed label executive. “They pretty much say, ‘This is what we want to do,’ and if you disagree with them you’re an idiot. It’s like dealing with a cult.”

Reading between the lines, it’s easy to sympathize with both sides. If you’re a label, you want enough diversity among your retailers so that none has the leverage over you that Apple currently has over the labels.

Conversely, asking Apple to unwind iPod and iTunes is like asking Gillette to make razors that work with blades made by Schick or asking Hewlett-Packard to make printers that accept ink cartridges made by Dell.

Pending the re-launch of Connect, Sony will be one of very few companies with a hardware/service combo to compete with Apple’s. But as long as Sony’s music files rely on Microsoft’s Windows Media (.wma) file format, Sony won’t have the barrier to entry (in the form of a proprietary file format) that Apple enjoys with AAC++. Instead, Sony’s files can be supported on non-Sony devices and its device will support non-Connect files.

Absent some sort of incentives from content holders to induce Apple to unwind iTunes/iPod, there’s always hardball. Already bothered about perceived inflexibility on track pricing and promotions, labels could withhold content from Apple or give better terms to Apple competitors such as Sony, which, conveniently, is also a content owner.

Technology journalist Sandy Murray has posted an interesting piece on Corante.com that offers several strong rebuttals to the labels’ demands.

“If iPods supported secure Windows Media files, it would doom the AAC file format and place Microsoft in the driver’s seat,” Murray writes. “Do label executives really think they would be better off if Microsoft was the dominant player in music downloads?”

Murray is also bearish about Sony’s chances:

“Sony can’t control the market as long as the Connect store relies on Microsoft's Windows Media file format,” he says.

Is Google being out-Froogled?

I guess we should’ve seen this coming from a mile away: Audio search engines.

Just recently, Yahoo! launched a beta version of its Audio Search, which allows you to search for music, podcasts, sound effects, interviews, e-Books and speeches. After it returns an index of services that sell the file you’ve searched for, you click “download” and are immediately directed to the web page from which you can download the track. The index tells you what formats, platforms and prices go with each service, as well as whether you can copy or burn a file from each service.

Mp3.com offers a similar service that directs you to downloads and streams and tells you what format each service uses and whether the service uses digital rights management (DRM).

Conspicuously absent is Google, whose labs page only lists a video search as the nearest competitor to Mp3.com’s and Yahoo!’s offerings. You’ve gotta think that an audio search is certainly under development in Mountain View, particularly given Google’s products for mobile devices.

Froogle is the classic example of Google using its technology to disintermediate markets for physical goods. It’s also the model for what Yahoo! and Mp3.com are doing for content markets such as iTunes, Audible, the New York Times, Audible, etc.