Commentary: MP3.com wants to be your music service provider

By Sujata Ramnarayan, Dataquest Analyst

By cutting a deal with two major record companies--and aggressively seeking more such deals--MP3.com has managed to overcome a legal defeat and is scrambling to build itself a role in the emerging industry of online music distribution.

However, the company must redefine itself to find that role.

MP3.com started as a way for

	See news story: MP3.com recasts as music "infrastructure" company

new artists to reach listeners directly over the Web, but most of those listeners still spend the majority of time listening to artists from major labels, and those labels are rapidly making plans to enter the online music business themselves. When they do, MP3.com will find itself to be a relatively unknown "middleman" at a serious disadvantage in competing with primary sources that are household names to many listeners.

MP3.com is thus taking the only course open to it: differentiate itself from other music sources by adding value to the music itself. Repositioning itself as a "music service provider" can give MP3.com a long-term future in the online music business.

MP3.com can provide many services to its users besides the music content itself, but it must be careful in how it executes them. The services include:

• Music storage: People can upload their MP3 files to the company's site and listen to them at other times and places. However, while MP3.com is negotiating with other record labels for rights to their music, the uploaded files cannot be used. Failure to cut a deal with a major studio would be a major hurdle to this aspect of the company's plans.

• Online radio: True "Internet radio" uses the streaming formats provided by RealNetworks and Microsoft rather than MP3.com. However, MP3.com offers a subscription-based classical music channel with a monthly fee, somewhat like a subscription radio station.

• Index services: Once someone uploads a CD library, MP3.com can provide searching, sorting, and indexing services. As a large number of selections build up over time, such a feature will become increasingly welcome for many people.

• Music catalogs: An expansion of the index function collates data across customers and across sites. This "TV guide" service will be one of the most popular, and it gives a clear advantage to an enterprise with a central repository that contains a large multiuser and multilabel collection. The main barrier is legal: Rights issues will be paramount when music crosses customer boundaries and must be resolved by pay-per-use mechanisms that have yet to be established.

• Profiling: Another database function compiles profiles of people's preferences based on their previous listening patterns and the contents of their libraries. This feature is attractive to many people; the main issues are privacy and user control of the profile.

A key aspect of MP3.com's value-added strategy is the payment model. While it intends to generate much of its revenue from advertising, not user fees, MP3.com already presents itself to some of its customers as a service provider by offering classical music on a subscription channel with a monthly fee.

However, with Internet access running only $20 a month, MP3.com faces strict limits on the fees that listeners will find reasonable. The company must find a balance that will keep the services affordable and widely available. In the online media business, as in other industries, the goal is to go beyond delivering a product to entering a relationship with the customer. That cements customer loyalty and enables enterprises to develop a brand identity based on the relationship rather than the product itself.

Adding listener services to the basic delivery of music will give MP3.com the opportunity to develop a brand that listeners will associate with everything they hear. It also gives MP3.com a variety of ways to segment its revenue stream and direct targeted advertising to its customers. However, services that properly belong in the realm of "customer service" must be provided at zero or low cost or listeners will put their ears elsewhere.

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.