Apple losing its grip on digital music

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Music companies are, understandably, wary about suggesting that they are giving their content away for free.

Yet the decision by Universal, the world’s largest music company, to back a new company that will diverge from rivals’ business models by offering songs for free and funding the service with advertising, reflects the willingness of music groups and other content providers to experiment with new ways to reach consumers on the internet. The FT revealed on Tuesday that Universal was supporting a new venture, SpiralFrog, which will launch in December.

The future of the industry, so far dominated by Apple’s iTunes music software and iPod players, remains hard to predict because so much music became available for free a few years ago when file-sharing services such as Napster took off and
millions of songs were passed around on the internet without a penny going to the likes of Universal Music, EMI, Sony BMG and Warner Music.

“The questions about business models in the digital age have not yet been answered,” says Jill Rosengard, managing director at Frank N Magid Associates, a research company.

“Of the three possible business models – pay-per-play, subscriptions or advertising-supported – so far pay-per-play is the only one that has really worked for music. Subscription models on the internet work but only for very specific and very valuable content.”

Three out of every four people in the US buying a digital music player opt for one of Apple’s iconic iPods. Apple also dominates in the sale of music to be played on these devices.

The company is estimated to control about 80 per cent of the market in legally downloaded digital music – reflecting the fact that its iPods do not easily allow downloads from rivals.

In the coming months, as retailers and manufacturers start to plan for Christmas, the proportion of new purchases for iPods is expected to decline. Millions of alternative digital music devices are expected to be sold – not least from Microsoft, which is working on its Zune music player and music download service. MTV, the US cable television music channel owned by Viacom, has already launched its Urge service, compatible with Microsoft rather than Apple technology.

As more distribution options become available, it might start to be clearer what business models will work best in the digital age.

For, in spite of Apple’s success at creating a market for digital music that is paid for, it is estimated by music industry bodies that for every legally downloaded tune, people are still illegally copying 40 others.

“The early winner in this debate is the model of paying for downloads,” says Ted Schadler, analyst at Forrester Research. “However, it is possible that different models will work for different people. Downloads might be best for younger people who define themselves by their music. Subscriptions might work best for older people who love music but are more comfortable not owning it.”

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