Music Marketing Obstacle: 30 Billion Illegal Downloads a Year

Legitimate Online Music Services Need High-Powered Marketing Strategies

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NEW YORK ( -- The competitive landscape for online subscription music services is likely to heat up over the next six to nine months, spurred by the success of Apple Computer's iTunes music store, which launched this spring.

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As of June 23, Apple reported more than five million download sales of music tracks.

Roxio's plan to relaunch Pressplay, which it recently acquired, as Napster -- albeit as a for-pay, legal music download service -- is a further sign that momentum is building in the category. But how will subscription download services such as MusicNet, MusicMatch, iTunes, Liquid Audio, Listen's Rhapsody, Full Audio's Music Now and Yahoo!'s Launch create viable businesses and create critical mass in a world where free services Kazaa, Grokster, iMesh and Morpheus rack up millions of downloads a month?

2 billion illegal downloads
At its peak, Napster had about 1.5 million people logged in on any given day and saw 2.7 billion -- yes, billion -- downloads a month, says Lee Black, senior analyst for Jupiter Research. Globally, illegal downloads are estimated at 2 billion to 2.6 billion per month and were forecast to have hit 24 billion to 31.2 billion in 2002, says Leo Kivijarv, director of research and publications for Veronis Suhler Stevenson. ComScore Networks puts the number of U.S. computers using Kazaa in May at 7.5 million, while the number of engaged visitors to subscription-based in May was only 920,000.

All the software encryption in the world won't eliminate illegal file-sharing and digital downloads, say industry-watchers. They say the legitimate services will need to create unique marketing propositions to differentiate themselves from one another. Marketing on the basis of ease-of-use, high-quality downloads, extra features, value-added incentives and strong customer service will all be important in coming months as the for-pay services compete for market share. Jupiter Research projects consumer spending on subscription music services will grow from $50 million in 2003 to $500 million by 2006.

The big question
The big question: Will the downloads kill the subscription services before they even get off the ground? Mr. Black wonders. The growing number of broadband Internet-enabled households is expected to help drive interest in and demand for subscription services. According to survey results from the Pew Internet & American Life Project, 29% of Internet users, or about 35 million Americans, say they have a broadband Internet connection at home and 41% of these broadband consumers (about 14 million), download music -- 9% on any given day.

Subscription services charge anywhere from $3.95 to $19.95 per month, depending on the number of downloads offered and whether CD burning is part of the subscription. Apple's a la carte store charges 99 cents per digital download, while Listen's Rhapsody charges 79 cents a track for CD burning. Volume discounts are also offered.

"The sweet spot is zero," laughs Josh Bernoff, an analyst at Forrester Research, when asked about the ideal price point for consumers.

While most of the services decline to specify their subscriber numbers other than to suggest they're in the "hundreds of thousands," MusicMatch is believed to have about 145,000 subscribers who pay between $3 and $5 a month, Mr. Bernoff says. The service doesn't offer CD burning and is more of a radio service.

All eyes on Windows
"The next six to nine months will be a very intense period for Windows [Microsoft Windows-based] music services," Mr. Bernoff says. The anticipated launch of Apple's iTunes for Windows PCs later this year, coupled with forays by Microsoft Corp. and Amazon into the space, is expected to stoke excitement in the category.

He projects that the period from December 2003 to April 2004 will see a rash of service launches, accompanied by high profile marketing pushes.

Mr. Black points out that subscription music services, backed in part by big record labels, have limped along for the last couple of years. They built network infrastructure, secured licenses and content and created alliances with portals and other content providers -- but there was no money for marketing to support subscriber acquisition and awareness-building. That is expected to change in the coming months. Apple's high-profile ad campaign by Omnicom Group's TBWA/Chiat/Day, Playa del Rey, Calif., has set the bar for rivals -- and it has begun to create category awareness.

Apple to benefit category
"Apple's marketing and media push is likely to drive awareness for the entire online music category. "The No. 1 factor is the brand," says Phil Leigh, digital media analyst at the investment firm Raymond James & Associates in St Petersburg, Fla. "The average person doesn't know Rhapsody and Full Audio and the others. ... The circumstances are almost ideal for the labels here; Apple is a brand that everyone knows."

Apple's iTunes struck a chord: "It really proved if you give consumers the rights to the downloads they want, they'll buy them," Mr. Black says. "Consumers have said as long as they can own it and copy it to other devices, they'll pay for it. ... Give them usage rights and they'll buy it."

Marketing quality
The legitimate services must try to beat the free services at their own game and market their strengths, Mr. Black contends. "The free services often have poorly encoded downloads, low bandwidth and tons of junk software. ... There will be a flight to quality service," he says. Word-of-mouth and viral marketing are considered critical to the future of online music subscription services. To date, "it has been very unclear how to position the services, but there's also been no money [for marketing]," Mr. Black asserts.

Marketing is key, Mr. Leigh maintains in a recent report: "As music shifts to Internet distribution, the value of brand recognition should not be underestimated," adding that big Internet brands like Yahoo!, Amazon, RealNetworks and Napster, repositioned from "free," will thrive.

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