November 1, 2011, 12:00 AM

A crescendo of competition

(Page 2 of 2)

While the offerings are similar, they aren't identical. Apple will have two paired offerings, iCloud and iTunes Match, which is not yet live. iCloud stores users' iTunes purchases on its web servers, or "cloud" in current parlance, and syncs that content so a consumer can listen to a tune from any Apple device.

Consumers who want access music they didn't buy on iTunes, such as music copied from CDs or pirated from the Internet, will be offered iTunes Match for $24.99 a year. Match scans a consumer's music library, then matches tracks against the iTunes library of roughly 18 million authorized tracks and adds the authorized version to the consumer's iTunes library.

Match represents a significant advance for Apple because it addresses the music industry's concerns that they get at least some compensation for music consumers pirated. It's also more convenient for consumers who no longer have to physically copy their music collections to a web-based service.

Google's Music offering allows consumers to upload music collections stored on computers and listen to them on up to eight devices, including Windows and Apple computers and mobile phones and tablet computers based on Google's Android operating system. The offering aims to tie together a consumer's devices, says a Google spokeswoman.

Meanwhile, Amazon Cloud Drive service isn't limited to just music; consumers can also store videos, photos and documents using the service. In addition, shoppers can purchase anywhere from 20 to 1,000 gigabytes of storage a year for prices ranging from $20 to $1,000.

Because neither Music nor Amazon Cloud Drive yet has an offering like iTunes Match—which requires music to agree to a service that can deliver possibly pirated music—they face an uphill battle, says Forrester's McQuivey. Add to that the fact that Apple already owns an estimated 70% of the retail digital music download business in the U.S., according to NPD Group estimates, and the battle gets even tougher. "Apple is in a strong position because they already have 15 to 20 million customers using iPads and another 30 million iPhone users," McQuivey says. "That's a strong starting point from which they can compel those customers to use their services."

Beyond music

The reason each of the three Internet giants is going after digital music doesn't really have much to do with music, McQuivey adds. "The music industry is a stepping stone to the major prize—cloud-based video," he says. "That's where the money will be made. That's where the consumer relationship is deepest and that's where we expect this to grow."

Consumers are accustomed to paying upwards of $100 a month to cable companies for TV shows and on-demand movies. If these online players could capture a fraction of those fees, the web-based video market could be extremely lucrative, McQuivey says. However, they no doubt will face stiff competition from cable companies, as well as from other Internet-based services like Hulu that deliver TV programming via the web.

Music offers a simpler value proposition because consumers want access to their music collections on the go, regardless of the device they're using, McQuivey says. And because the industry is in peril, it's ripe for experimentation.

Apple showed how a company could become consumers' prime source for music by combining slick devices and an easy-to-use online service. Apple maintaining that position, and its competitors developing that connection, is what the new music services are all about.

The bridge

Amazon tried to establish that link in May when it offered digital copies of Lady Gaga's new album, for 99 cents, $11 cheaper than the price on iTunes. Amazon saw the promotion as a way to publicize its Cloud Drive service, which was advertised below the product description.

However the promotion backfired as heavy demand overwhelmed Amazon's servers, which slowed and eventually stalled, leaving consumers unable to download or listen to the album. "Reminds me why I usually use iTunes," said one consumer on Twitter. Amazon responded in a tweet that said, "We're currently experiencing very high volume. If you order today, you will get the full @ladygaga album for $.99. Thanks for your patience."

Two days later Amazon attempted the Lady Gaga promotion again. "We saw extraordinary response to Monday's promotion, far above what we expected. She definitely melted some servers," Craig Pape, Amazon's director of music, posted online. "So we're doing it again, and this time we're ready."

Those hiccups provided a poor introduction to the Amazon offering, which most consumers probably weren't familiar with before, McQuivey says.

The other guys

Besides having to get their services up to speed, Apple, Amazon and Google must be ready for competition from such challengers as Rhapsody, Pandora and Spotify.

Spotify, which launched in the U.S. in July after establishing itself in Europe, will likely make a dent in the market, says Dave Bakula, Nielsen Co. senior vice president, analytics, entertainment. But how much, he says, will depend on consumer reaction if it adds restrictions, such as a 10-hour monthly limit to the service, which offers free, ad-supported access to 15 million songs. Consumers will be able to avoid the limit by paying a monthly fee.

Key to Spotify's potential growth, Bakula says, is whether it sparks a transformation in how consumers consume music, from buying a music or a digital track to renting music, and streaming it when they want to hear it. "That's the big question," he says. "Will the music industry follow the path of the video industry? If I love a song do I need to own it?" If consumers are willing to rent instead of buy, Spotify could potentially be to music what Netflix is to video, Bakula says.

Competition from upstarts like Spotify likely will make online music retailing even less profitable in the short run. But Apple, Amazon and Google seem convinced that music is a crucial lure for their other products and services. "It's a bet they have to take," McQuivey says. "If they wait it will be too late because someone will have cemented their position and they'll have missed the opportunity."

zak@verticalwebmedia.com

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