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Commentary: A tougher sell for iTunes

Europeans can now buy songs from the trend-setting service, but Apple won't repeat its staggering U.S. success.

Commentary: A tougher sell for iTunes
By Forrester Research
Special to CNET
June 15, 2004, 4:30PM PT

by Paul Jackson and Rebecca Ulph Jennings, analysts

With Apple Computer's launch of the iTunes Music Store in Britain, France and Germany, many Europeans can now buy songs from the world's most successful online music service.

But times have changed since the iTunes Music Store's heady U.S. launch in April 2003--Napster, Sony and On Demand Distribution (OD2) already have multiple offerings, and hardware companies like Creative Labs now also offer cool hard-disk audio players. Apple will not repeat its staggering U.S. success, but new innovations like the AirPort Express and the iPod Mini will ensure that the company takes a large share of the European music download market.

As of Tuesday, British, French and German consumers can buy music online from the newly launched European iTunes Music Stores. Tracks cost 79 pence, or 99 Euro cents, and the store replicates all the services--such as play lists and CD burning--that the existing, hugely successful U.S. store offers. Launching almost 14 months after the U.S. version, the European iTunes Music store will:

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• Quickly grab a share of the 130 million euros of downloaded music revenue in 2004. Forrester estimates that the European paid-for downloads market, worth 24 million euros in 2003, will grow by more than 500 percent in 2004--driven by rapidly increasing user acceptance and expanding service offerings. If Apple's European service matches the U.S. offering in terms of usability and a wide selection, it can expect to quickly generate millions of euros in revenue, while many competing services--such as MSN Music Club--trail in one or both of these aspects.

• Draw on Emotive Networks to grow a user base and loyalty. This third-generation iTunes Music Store, initially launched in the United States in April 2003, includes a new network-based application called iMix. This feature is an attempt to create an Emotive Network: It allows users to publish their play lists to the store so that other users can see, rate and--Apple hopes--buy tracks off them. This means that consumers are tied to the iTunes store but don't mind because they feel that they are part of an active community of like-minded peers.

• Benefit from the halo effect of new, innovative hardware. In addition to July's European release of the very popular iPod Mini, Apple has announced a new piece of hardware called the AirPort Express--a plug-size Wi-Fi music streamer combined with Wi-Fi access point functionality and remote printing facilities. This device is the simplest Wi-Fi music streamer so far released; it offers a much simpler, more powerful and cheaper solution than devices like the Linksys Wireless-B Media Adapter do. When combined with iTunes, this device also offers the kind of plug-and-play ease of use that's vital for the emergence of the digital home.

A changing scene
The online music market has changed significantly during the past 15 months--catalyzed by Apple's introduction of 99 cent per track downloads in its iTunes Music Store--and Apple is no longer a standout leader in this field, especially in Europe. Apple enters the market:

• After several other high-profile launches. The United Kingdom has a wide selection of existing music stores that have beaten Apple to market. These come from existing industry heavyweights like Sony and Napster, from less-recognizable names like Wippet, and from smaller offerings, largely powered by OD2. Elsewhere in Europe, offerings from major names like Tiscali, RTL and Eircom have also captured headlines and audience attention.

• When other products threaten to eclipse the iPod and iPod Mini. Apple's iPod is still a design icon, and the iPod Mini has renewed interest in Apple players. But manufacturers like Creative Labs and Philips now offer devices that look as good as the iPod, claim to have better battery life, and usually cost less. It's a crowded market; OD2 says there are 70 players that can play tracks downloaded from its service. Additionally, Microsoft-driven devices will emerge by the end of 2004--making today's iPod look positively dated.

The European outlook
In the United States, the first round of the online music war is already over: Apple won. The battle has already shifted to discounting (Wal-Mart Stores) and PC manufacturer bundling (Dell, HP, Gateway and so on.). In Europe, by contrast, Apple is coming late to the party. To succeed, European services must:

• Differentiate via local content support. While U.S. and U.K. artists have a strong following in continental Europe, companies like Germany's Viva music TV channel have shown that offerings gain wider appeal when they include local artists. In Europe, more than half of music sold is of European origin; offerings must reflect this. Services will need to employ local languages, emphasize support for local artists and support multiple payment systems--such as debit rather than credit cards--in order to grow the 20 percent of European Internet consumers who currently download music online.

• Make efforts to overcome low broadband penetration. With OD2 announcing its online jukebox--providing access to streamed, rather than downloaded, content--the market has seen the first acknowledgement of the 72 percent of online consumers who have slow Net connections. Other services must follow suit; in addition to increasing partnerships with physical music stores to showcase digital music applications, they must open the market to users--such as teens--who can afford a cheap MP3 player but not an expensive (in the United Kingdom, at least) home connection.

• Expand flexibility to avoid becoming an early casualty. The International Federation of the Phonographic Industry lists more than 60 European sites that already offer legal downloads in Europe. Many won't survive 2005. To do so, services must offer the widest range of music to the widest range of users; Sony must make its service available beyond its own proprietary MiniDisc players, and Napster must expand outside Britain--fast. Survival will be hardest for sites without an ulterior motive for selling downloads; those without hardware to push, portal content to generate loyalty for, or physical stores to promote. Sites simply looking to turn a profit on downloading face increasingly squeezed margins and stiff price competition.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.