September 30, 2004, 12:00 AM

Tuning In

(Page 2 of 3)

Circuit City Stores Inc. has taken the multi-channel approach a step further by acquiring its own digital music service, MusicNow LLC, which the retailer is promoting throughout CircuitCity.com as part of a recent site redesign as well as through its 600 stores. "There`s not a lot of profit margin in digital music right now if you`re using a middleman, so we wanted to own our own service," says Fiona Dias, senior vice president of Circuit City Stores and president of Circuit City Direct. "We`re the only retailer now that sells its own digital music and CDs."

Circuit City lets customers purchase music downloads in its stores as well as on its web site, and promotes in its stores package deals of digital media players and related equipment.

Questionable future

Apple Computer remains the market leader by far, however, with more than 100 million digital music songs sold since it launched its iTunes service in April 2003, accounting for about 70% of legal downloads. Experts attribute Apple`s lead to its first-to-market strategy and its popular iPod media player. "There`s no Windows Media iPod equivalent," says Jupiter analyst David Card, adding that no Windows media players have received the kind of marketing support that Apple has put behind the iPod.

Apple also has several digital music marketing partners, including Hewlett-Packard Computer Co., Volkswagen and the Walt Disney Co., and it recently introduced its fourth generation iPod. The newest iPod features a Click Wheel feature for one-handed navigation and extended battery life of up to 12 hours.

But while other digital music providers are pushing multi-channel strategies with wide exposure in stores and an open policy on using different varieties of Windows media players, Apple will continue to emphasize its depth of iTunes services as well as the iPod. Apple says it has sold more than 4 million iPods at $299 to $399 depending on the number of songs they can hold, accounting for 52% of all digital media players.

But Apple`s strength in the digital music market is also its potential weakness, because it restricts mobile downloads to iPods. Many observers draw an analogy between Apple`s iTunes strategy and its home computer strategy. Apple developed a superior operating system for home computers, but wouldn`t license it for any use except on Apple computers. Without a core of developers coming up with new uses for the Apple, the market shifted to PCs and the Microsoft operating systems. A promising technology is today a minor factor in the PC world. Similarly, the company risks isolation from the growing digital music market as Windows media players gain acceptance, giving its competition the chance to chip away at its market lead, experts say.

"The iPod is a nice industrial design, but we`ll soon begin to see better designs in other media players," says Brad Duea, president of Napster. "It`s hard to say that anyone will surpass the iPod design, but this fall we`ll start to see things happen, such as better choices of color screens."

Napster`s new player

Napster has processed more than 20 million song downloads since it emerged from its illegal file-sharing predecessor as a commercial service in October 2003, and it has a catalog of more than 1 million tracks, Duea says. It expects to continue growing at a rapid pace with a multi-channel strategy as well as a pricing structure designed to contrast with Apple`s, he adds.

A new Napster to Go service, which Napster will make available this fall in a link through the new Windows Media Player 10, is designed to hit Apple hard on pricing, Duea says. The service will debut with an introductory monthly subscription price of $14.85, which will allow users to download unlimited songs from Napster`s catalog to a PC as well as to a 20-gigabyte Napster to Go media player, which will retail for $299.

By comparison, Duea says, it would cost close to $5,000 to fill a comparable 20-gigabyte iPod (which also retails for $299) at Apple`s per-song price of 99 cents. Apple offers no monthly subscription fee. "At our monthly fee, it would take 27 years to add up to $5,000," Duea says.

Napster says it will not announce a permanent monthly fee for Napster to Go until later this year, but Duea insists it will still be a bargain compared to iTunes. Apple did not make any executives available to comment for this story.

Like Wal-Mart, Napster is also building a presence in stores, and it was the first to offer stored-value cards in retail outlets, including Safeway supermarkets and consumer electronics retailers Best Buy, RadioShack and CompUSA.

Partners and competitors

But in the quickly changing market, even some partners can also be competitors. While Napster has high expectations for its Napster to Go service as part of Microsoft`s new Windows Media Player 10, Microsoft itself has entered the market as a seller of digital music. In the same week in August that it launched the new media player, which lets users link directly to Napster, WalMart.com, Circuit City`s MusicNow and other services, Microsoft also launched its own digital songs download service at MSN.com.

The MSN Music service lets users download music through a web browser or directly from the Windows Media Player. MSN is offering a selection of more than 1 million tracks, at 99 cents per song, from more than 3,000 music labels.

"Our vision is to deliver a seamless, end-to-end experience for discovering, downloading, and playing music, videos, and more, anywhere," says Jonathan Usher, Microsoft`s director of Windows Digital Media marketing. "These releases are an important step forward in delivering on that vision." The new media player also provides direct links to CinemaNow.com and it offers a separate "browse all" link to connect with virtually all other digital music download services.

Even eBay is getting into the market, or at least testing it, with about 20 sellers in its new Digital Downloads section. The move represents a policy reversal for eBay, which up to now has avoided getting involved with any types of digital downloads, including e-books and software. "We`re going to gauge how well digital music downloads will sell in the eBay marketplace," a spokesman says. He adds that eBay will pre-approve all sellers to check for ownership rights. After receiving payment through Bay`s checkout process, sellers e-mail their customer a link to a web page for downloading music from the seller`s own media player software.

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