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Microsoft planning music subscription service

Feeling Apple's sting, software giant looks to diminish iTunes' influence with new "rental" plan.

With Apple Computer's dominance over the digital music business growing, Microsoft is planning to bolster its own online song store with a new subscription service later this year, sources familiar with the plans say.

The software giant launched its song download store, similar to Apple's iTunes store, last September. The Microsoft MSN-branded service did not include a subscription plan at that time, focusing instead on selling individual songs online and through Windows Media Player.

But Microsoft is now working with record labels and copyright holders in preparation for launching its subscription-based component, sources familiar with the talks said. The company held an event earlier this week in New York aimed at providing an update on the project's progress, sources said.

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What's new:
Feeling Apple's sting, Microsoft is looking to diminish iTunes' influence with a new subscription music service. Sources say the company is also considering a more direct attack on Apple, seeking rights from copyright holders to give subscribers a Microsoft-formatted version of any song purchased from iTunes so they can be played on devices other than an iPod.

Bottom line:
The new service could complicate the delicate balance Microsoft has struck in the digital music business, by both providing key technology for companies such as Yahoo and Napster, while also competing with them.

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The tentative features of the new service--which is still under development--include advanced community aspects and playlist-sharing. But sources say Microsoft is also considering a more direct attack on Apple, seeking rights from copyright holders to give subscribers a new, Microsoft-formatted version of any song they've purchased from the iTunes store so those songs can be played on devices other than an iPod.

Microsoft declined to comment specifically on the service.

"We think that the subscription model is very interesting," said Christine Andrews, lead product manager for MSN. "It is something that we will continue to look into, but we don't have anything specific to announce at this time."

The new service could complicate the delicate balance Microsoft has struck in the digital music business, by both providing key technology for companies such as Yahoo and Napster, while also competing with them.

That Microsoft is willing to complicate that relationship underlines how important the digital media business has become, analysts say. Microsoft and others see the future of home computing focusing increasingly around digital entertainment and consumer electronics, and in that space Apple has taken a substantial lead with its iPod music player and iTunes digital music store.

Indeed, at its developers' conference in San Francisco this week, Apple CEO Steve Jobs announced that the iTunes store had captured an 82 percent market share in the digital download business in May, despite ongoing competition from Microsoft, Yahoo, Sony, RealNetworks and others.

"The main thing for Microsoft as a company is to get as much use as possible for the PC as a home entertainment device, and one way to do that is ensure that there is a lot of readily available content," said Matt Rosoff, an analyst for research firm Directions on Microsoft. "Their concern is that none of the partner services will take off or will be effective, keeping Apple as a dominant platform."

Like others, must explain subscriptions
According to people familiar with the company's plans, the service is being developed as a piece of downloadable software separate from the standard Windows Media Player--a departure for a company that has historically pressed all multimedia content into its basic player software.

Much like the recently released Yahoo Unlimited subscription service, the new Microsoft offering would have built-in playlist-sharing features that would allow members to replicate much of the communal appeal of file-sharing.

The company also appears to be planning aggressive promotional pricing in the early months of release, likely to be competitive with Yahoo's $6.99 per month fees, sources said. That could be bad news for RealNetworks and Napster, each of which charges close to $15 for the versions of their subscription services that allow transfer of music to portable devices.

"The most important question is what ability Microsoft and its partners have to explain this model to consumers."
--Michael Gartenberg, analyst, Jupiter Research

The ability to download replacement copies of iTunes-purchased song would be aimed at boosting the fortunes of Windows-compatible MP3 player manufacturers such as iRiver and Creative Technologies. Because Apple does not license its FairPlay copy-protection format to other companies, iTunes-purchased songs can be played directly only on the iPod.

Sources said that the iTunes replacement plan would require agreements from multiple copyright holders, and may not come to pass, however.

Analysts caution that Microsoft will have the same problem that its partners have had in persuading consumers to adopt the "rental" model, in which access to a vast catalog of music is available all at once, but all the music vanishes when a subscriber stops paying. But if Microsoft is able to make that leap, its presence in the market could actually help its rivals as consumers finally adapt to the subscription idea, some said.

"The most important question is what ability Microsoft and its partners have to explain this model to consumers," said Jupiter Research analyst Michael Gartenberg. "At this point, the whole online music market is centered around Apple and the other guys."

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