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Internet Video & Voice For more information visit the Internet Video & Voice homepage. Music online1 OverviewThere are three main ways of obtaining music online, other than streaming radio to the PC.
This profile concentrates on the second case, where music is paid for but delivered digitally, often over broadband. Because of the relative ease of copying, the high cost of CDs and the convenient file size (compared to films, for example), music was soon being swapped for free in the MP3 file format. Napster P2P software, and the legal action against it, brought online music to global prominence, and a host of sites sponsored by retailers, ISPs and record companies tried to offer music for download – for a fee. But as of mid 2003, paid-for music, at least in most countries, was still most popularly delivered as physical CDs, rather than as downloaded files. And free material dominated the download scene. This undermines attempts to market pay-for content sites, as does the confusing number of them, each one offering only a subset of available music. As a result, the online music industry is in a confused state, with an undeveloped business model. In these circumstances, market entry should be approached with caution. 2 Key features2.1 Typical experienceA customer with a PC and a broadband connection wants to listen to a song that they don’t have. They visit a music site, such as www.dotmusic.com, and check that they have the software requirements to play the songs. (In this case Windows Media Player version 7 and above, plus a soundcard and speakers/headphones.) If they're not sure, they can run a test automatically from the Website, which checks their program files for them automatically. They can also download a test song, to check that their system is suitable for listening to music. Having done this, they can then decide whether to subscribe on a monthly basis for unlimited downloads, or to buy music on a pay as you go basis, which also gives the option of burning to a CD, if they have the equipment to do this. Once they have chosen and set up billing details using a credit card, the site gives them a number of credits to spend on streams of music, or downloads. The subscriber then selects the track they want, and can opt to hear a free 30 second sample before they buy. The customer then either streams the song in real time, or downloads it to a hard disk to play a repeated number of times. Songs are sent in Windows Media Player format. The dotmusic service charges 10 credits for a download, and 1 for a stream, although the unlimited service allows the customer to download as much as they want. If the customer wants to listen to the song on another device (for example a PDA with the appropriate media software), they will not be able to do so on the dotmusic.com service, although this is possible with some services. In the dotmusic example, they would have to pay to download the song again to the other device. And if they wanted to listen to the song on their CD stereo hi-fi system, they would have to pay per song to download the song with the appropriate licence to enable them to do that. The customer is then billed via their credit card account. The online music provider settles royalty payments with record companies. 2.2 Customer appealIn general, online music offers the following advantages over purchasing a physical CD or DVD:
In particular, paid-for music sites offer the following benefits over free peer-to-peer sites:
2.3 VariationsCD retailers ‘Clicks and mortar’ or pure-Internet retailers sell physical CDs from a Web site, and then deliver them to the customer by mail or courier. This is the longest established method of Internet music shopping, and the biggest in financial terms in 2003. Free download sites Peer-to-peer sites like Grokster do not actually have music for download on their servers. Instead they make available free peer-to-peer software which allows the user's computer to search through the playlists of songs contained on other computers that are running the same software and are currently online. The required song is then sent from one PC to another over the Internet, without passing through a Web server, which is why it is called peer-to-peer communication. Internet radio Internet radio sites send an audio stream to the listener’s computer. Nothing is downloaded onto the hard disk. It is a good way to listen to one or many radio stations from another part of the world. This kind of audio is also a good use for low-end broadband products that operate at speeds of around 256 Kbps, because they have sufficient average bandwidth to give good sound quality. Sound quality suffers in practice over a dial up connection. 2.4 Leading examplesiTunes Apple’s iTunes is one of the most talked about music services, because it appears to generate substantial revenues, and because it is operated by a leading brand in the computer industry. Apple reported that users bought and downloaded 2 million songs, at 99 cents each, in the first 16 days of the service. These sales are impressive, because the installed base of Apple computers represents only a small proportion of total PCs, under 5%. Users are initially limited to the USA. Some reports are quoting profit margins of around 35% for Apple, but this has not been confirmed. Apple also states that over half the songs were purchased as complete albums, rather than individual tracks. Many critics had thought that very few albums would be bought online, as customers bought only the particular tracks they wanted. This prediction currently appears premature. Apple's service allows users to transfer tracks between the different Apple devices that they own, including the iPod portable music player. This flexibility in the terms and conditions of use is one of the attractions of the service. But although the service offers over 200,000 songs, there remain major gaps due to the complexity of licensing arrangements in different countries. For example, no songs by The Beatles are available. dotmusic BT's dotmusic service is available to any PC user connected to the Internet, located in many, but not all countries. It supplies songs in Windows Media Player format, again allowing control of music rights. Unlike the iTunes service, dotmusic offers both subscription and pay-as-you go services. For example, a £9.99 subscription gives unlimited credits for downloads and streaming. In order to burn tracks to a CD, songs must be purchased on a pay-as-you go basis, with prices from £0.99 to £1.49 per song. Another difference from the iTunes service is that the downloaded songs can only be played on the computer to which they are first saved. Customers are not allowed to move songs between devices. Downloaded songs are also deactivated a number of days after a customer's subscription stops. (If a customer subscribes again after a period of time, the songs are made active again.) 2.5 SuppliersAn online music service requires a suite of different software components. Key operations are: Encryption and digital rights management, ensuring that only eligible people can access the music. Even if a copy of the song remains on a lapsed subscriber’s hard disc, DRM software ensures that it remains ‘locked’ and unplayable. There has been considerable consolidation in the digital rights management software market. Many companies have been acquired since the high-point of Internet start-up companies in 2000. Compression. Digitally-encoded songs are compressed to give a DVD-quality sound for a file size of around 3 Mb for a typical song. Searching. Most music sites use recommendation engines that recommend songs to subscribers. These recommendations are based on the buying and listening habits of other subscribers. Streaming and playback. Media server software should be scalable to the number of subscribers. Media player software needs to support digital rights management functions. Software requirements and suppliers for music services
3 Marketing3.1 Target marketsThe key target audience is Internet-aware music fans, who consume a large amount of music. Users of P2P download sites will be strong prospects for these services, especially if they have guilty feelings about 'stealing' music from struggling musicians. Traditional music buyers will still want to buy CDs to play on their hi-fi systems, and downloaded music does not offer this functionality yet. This market will probably have to wait for a more consumer-friendly, plug-and-play approach to digital music. Web site stores enable them to buy CDs online. Other niches like classical music or jazz are beginning to be served by specialist sites. If sites can put the copyright deals in place to enable them to sell round the world, the cumulative audience globally could be significant. An interesting development is selling multi-user subscriptions to organisations like libraries. Classical.com has signed multi-user licence deals with libraries. This enables registered library users to listen online via streaming audio to the music, and means that the library does not have to carry a huge physical collection of classical CDs. 3.2 PricesThe table below shows some indicative prices for music services, standardised to US Dollars. Comparative prices for music services
3.3 Promotional techniquesThe main messages of online music sites are choice, convenience and price, as outlined in 2.2 above. As back catalogue and out-of-print recordings are digitised, together with recordings from independent record labels, the comprehensive nature of the online catalogue becomes a major selling point. These headline product and price messages are reinforced by supporting material. This includes features such as
Another market for downloaded music content is mobile telephone ringtones. Although this is a different business serving a different technology, it is worth noting that sales of music and sounds for wireless ringtones is expected to generate more income than sales of CD singles in the UK during 2003. Phone users, especially young people, are prepared to spend a couple of dollars on music delivered in this format. 3.4 Marketing issuesOne problem with pay-for online music download sites is that there are always gaps in the songs and music offered. This is because of the complexity of licensing recorded music sold by different record companies in different territories around the world. This is confusing for the customer, because they do not know or care which record label their favourite artist has a deal with. They also do not care if that particular company does or does not have an agreement to sell a particular song in their country or not. They just want the song. Unfortunately, the song may not always be available from a legitimate site. To make matters worse, it probably will be listed on a free MP3 peer-to-peer site. Hopefully this issue will be resolved in the medium term, although much legal work is involved in these cases and the online catalogue will expand slowly. Record companies are beginning to be more open to online music, in theory at least, whilst they continue to explore various legal ways of shutting down free P2P music distribution. An unexpected consequence of the strong-arm tactics used by the RIAA to crack down on P2P sites is that it has politicised many high-volume music fans, who are now extremely committed to the idea of free music, and firm in their belief that they should not pay for it. To caricature their position, they equate record companies with outmoded practices and the use of Draconian legal powers to protect their profits. These music fans could represent a major market segment, but need to be approached with care, as they have a great reluctance to pay for services. As Apple's iTunes service has shown, a transparent approach to online music sales, plus a realistic pricing policy, has attracted a significant paying customer base. 4 Technical requirements4.1 HardwareThe customer needs a computer with a soundcard and speakers or headphones to listen to the music. The terms and conditions of the service that they have used to buy the music may also allow them to play music on other devices such as PDAs or multimedia mobile phones. Customers would need the appropriate connectors to transfer songs between devices if they wanted to do this. Paid-for songs are stored in non-MP3 formats which allow for licence control. Customers will therefore need to be running Windows Media Player (for PCs) or QuickTime (for Apple), or some other proprietary system. 4.2 Communications link128 Kbps gives CD-quality sound under most conditions, so ISDN lines can be used for streaming, although broadband connections are better. For downloads, dial-up 56k connections can be used. But downloading a typical 4 minute song, at a file size of 3-4 Mb, could easily take 10 minutes or more. A song will take about a minute to download over broadband. 4.3 Digital rights managementDigital rights management is fundamental to offering a paid-for music service over the Internet. Content owners (in this case record companies) want to protect their intellectual property assets. In most cases, they will only allow the downloading of songs to a single registered computer or the devices of a single user. In addition, customers of subscription services may only have access to downloaded music during the period of their subscription. Music service providers need to have the software in place to manage these access rights. They need to control who is able to access the content, and what they are allowed to do and for how long. This control is achieved by downloading a licence for each song alongside the actual song file itself. This licence is tamper-proof, and provides details to the music playing software (Windows Media Player for example) of the duration of the licence, as well as other information such as the devices that each song can be played on. Licensing information is updated as the consumer keeps subscribing every month. If the customer fails to make subscription payments or cancels a subscription, the licence is not updated, and songs are made unplayable. From the customer's perspective, all of this is outlined in the terms and conditions of the online music service. Music providers and their suppliers are trying to strike a balance between an easy-to-use system and a way of protecting content against all but the most expert hackers. 4.5 BillingBilling for online music services is usually handled via a credit card account. Customers pay a monthly subscription, or pay per song, or a combination of the two. Some telcos, notably Deutsche Telekom, offer the option to pay for content services such as music or video on the monthly telephone bill. 5 Business Model and value chain5.1 Value chainThe roles of different players in the value chain are summarised in the table below, together with Point Topic's estimate of their revenue share (in cents) from the sale of a single $1 song. Roles and revenue shares of players in the online music service value chain
The powerful players in the value chain are the content owners (usually the record companies) and the music sites. The record companies have ultimate control of the content, and this puts them in a strong position as they are able to dictate terms, for example about the level of anti-piracy protection they require. But they are also faced with declining CD sales and millions of people downloading free MP3 files. That means they have to take positive steps to make their music available to paying customers online quickly, so that they are now dealing with content aggregators and music sites, having ignored Internet music for too long. Music site companies are also in a powerful position, as they control the brands and 'virtual real estate' that consumers know and want to visit. They fulfil a similar function to music retailers or radio stations. Consumers will often have a relatively lucrative subscription relationship with a music site, which means regular cash flow. Customer inertia means that they will not churn as quickly as music fans swapping between free sites. 5.2 Sample business caseIn Point Topic’s opinion, this market is crowded and confused. There are many competing sites, some offering legitimate, paid for content, others offering free music using P2P networking. The legal position of the P2P sites is still undecided in some jurisdictions, with ongoing lawsuits in the USA. This uncertainty makes market entry a risky strategy in the short term, where there is risk in developing the right business model for online music. These business models are still developing, but opportunities exist to enter the online music market in the medium term (see 5.3). Because P2P networks offer a generally fair quality, free alternative to paid-for music, they take a large audience share away from legitimate, paid for sites. They also provide a very wide choice of less mainstream, back-catalogue music that the official sites have not yet made available, often due to record company inertia. The digital rights management issues are also complex, with systems needed to manage royalty payments to songwriters, song publishers, performers and record companies (although 'best of breed applications are beginning to become available based around standard platforms). Add to this the reluctance of some companies to make individual songs from albums available for download, and the list of songs that can be offered is often incomplete from a consumer’s point of view. The option of buying music rights is costly, although possible for niche markets such as classical music. Having said all that, the entry of Apple to the market in mid-2003 shows that there is faith in the corporate world that money can be made from online music. But entrants to the online music market still need patience for lengthy rights negotiations. 5.3 Entry opportunitiesISPs From an ISP’s point of view, the best strategy is one of partnership with established online music sites. This minimises the investment that the ISP needs to make to bring legitimate musical content to its customers, and makes the ISPs offer to the customer more varied.. But the ISP could play an important role in providing billing and digital fulfilment services. T-Online in Germany is developing its content provision. Customers download proprietary software, and this allows small content purchases to be added to the monthly DT telephone bill. DT is trying to increase its revenues from content services. Another option is that the ISP could offer a hosted pay-for music download service to a record company or other content owner. The ISP would handle the technical implementation and billing aspects of the project. Or it might choose to outsource the digital rights management aspects of the project The ISP would also bring its customer base, and would be able to make online music available to customers unsure how to use the rather techy P2P sites like Grokster. In the medium term, this strategy should increase ARPU for ISPs, without the need to invest millions of dollars to develop their own content or music brand. As competition forces revenues from basic access down, this additional revenue will be very important. Content aggregators and music sites Many content aggregators operate as music sites themselves. Some also offer an outsourced solution for online music delivery. Others, like OD2, are not consumer facing, but deal exclusively with other content sites. Another group, like Broadcast Music Inc (BMI) in the USA or the Performing Rights Society (PRS) in the UK, provide services such as paying royalties to artists, songwriters or other copyright holders. Content aggregators need to gain and keep the trust of record companies, by offering appropriate security systems to protect and charge for music. This means it is important to choose the right delivery platform for music, striking a balance between ease of use and protection. The opportunity is to develop the crystallising business models further, and develop new links with music sites and content portals run by ISPs or other operators. Content owners Although piracy is a threat, the opportunities of online music cannot be ignored. Digital rights management systems mean that content distribution can be controlled, and customers charged for music. The Apple or dotmusic business model shows that online music distribution sites can be trusted with content. With the right partners to deal with the technical and billing aspects, selling content online will be a useful additional revenue stream in the near future. 5.4 Future developmentIn the medium term, there will be aggregation in the online music market, with fewer portals offering a wider choice of music. There will be a steady migration to paid-for services for mainstream music at least, as prices start to reduce slightly, and the quality and convenience aspects become better understood. But free peer-to-peer music will probably still remain the most popular form of digital music for a long time. It will be difficult to change people’s expectations that information and resources on the Internet should be free. Record companies will agree to licence most content using an industry-standard security system that offers a good level of protection whilst remaining relatively simple to use. Independents and start-up musicians will still probably make use of peer-to-peer networks. 6 Service listing6.1 Operational servicesThe total number of users for the free music sites is estimated at over 100 million worldwide. Paid-for sites are still only a fraction of that although some are claiming numbers in the millions. Music sites and offerings
6.2 Sources‘Microsoft enters music download fray in the UK’, 14 August 2003, silicon.com ‘Mobile ringtones outstrip CD single sales’, 12 August 2003, silicon.com ‘iTunes Music Store tops two million song downloads’, 14 May 2003, press release, www.apple.com |
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