Tuesday, August 30, 2005

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).

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