Music industry embraces an online future

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Consumers are flocking to online music services in record numbers, and digital music made up about 1 percent of total industry revenues in 2004. Industry estimates expect it to double in 2005 and reach 25 percent within five years.

How digital music will be purchased and consumed--at online music stores, or through "all you can eat" subscription plans--was a heated topic among attendees at the conference in France's Cote d'Azur.

Subscription services like Napster and RealNetworks' Rhapsody, which offer unlimited access to an enormous library of music for a monthly fee, are facing off against online stores like Apple Computer's market-leading iTunes, which sells music by the track and is closely integrated with its wildly popular iPod portable music player.

"We're unconcerned about the installed base of iPod users," said Chris Gorog, chairman of Napster, which in its original incarnation unleashed the peer-to-peer file-sharing revolution that almost brought the music industry to its knees.

"Our primary market is people who have not yet entered the digital music market," Gorog added. "As soon as Napster to Go (which allows Napster subscribers to transfer their music to portable devices) is released, their market share is going to go down."

Music companies say there is room for both models, but warn that explaining the concept of music subscriptions to consumers will not be easy and will require heavy marketing spending.

"The subscription model will be incredibly popular once people understand it and get their heads around it," said Barney Wragg, vice president of Universal Music International's new media division, Elabs. "The difficulty is that it's so radically different to what people have seen in the past. It's not like an electronic version of a record store."

"You're paying for access to a library," he added, "and if you stop paying, you lose access. So it's philosophically different from a CD or a download you own forever."

Thomas Hesse, president of Sony BMG's global digital business division, said, "Subscriptions and downloads both have their role to play with consumers. Some consumers want to own so that they can pass on to their children; others don't care about collecting, they just care about access. And they want access to everything."

Another hot topic at Midem was music on mobile phones, either loaded from a PC or downloaded wirelessly over high-speed 3G networks. Phone ring tones are already a $1-billion-a-year industry, and music industries are hungrily eyeing the huge global installed base of mobiles as a way to sell digital music to the masses.

Music on mobiles has yet to become mainstream, and questions remain about whether the public will embrace the technology. But operators like Vodafone are already offering full-song downloads on 3G, and Apple and Motorola are working to bring out a phone that can play songs purchased from the iTunes music store.

"This is not about trying to kill iPod," said Guy Laurence, global consumer marketing director for Vodafone.

But the iTunes Motorola phone "is not an industrywide solution," he said. "The cost of those devices is outside the industry norm. And it excludes us from any after-market revenue stream. We'd have to think very carefully before we subsidized the cost of those phones for our subscribers."

Apple, which many credit for kick-starting the boom in digital music with the iPod and iTunes, was a ubiquitous presence at the conference, despite not sending any high-profile executives. The company has drawn the ire of many in the industry for refusing to share its technological standards, meaning that songs purchased at iTunes cannot be played on any portable device except an iPod.

"Apple has made the mistake before of getting into a corner with a proprietary system," said Hesse of Sony BMG. "The consumer would hugely benefit by having clarity on interoperability. At the end of the day, what the consumer wants is going to happen."

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