Hey, iTunes, Move Over

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Wooing the Napster Generation from Pirated Music

The imeem experiment is being closely watched as a potential trailblazer of a new ad-supported model. Caldwell notes that music companies have never made money from advertising, choosing to make their songs available free on radio stations, Viacom's (VIA) MTV, and more recently News Corp.'s (NWS) MySpace as a way to promote vinyl and CD sales. Indeed, Universal seems to be tiring of giving it away for free. In recent days, MySpace began restricting play of Universal songs to 90-second clips, rather than full songs.

By making music available in compelling new ways, imeem and others could potentially woo members of the Napster generation away from unsanctioned piracy sites. "We think the opportunity for real revenue growth is for ad-supported music," Caldwell says. "It can be as big as the download business, and Apple doesn't have a stranglehold."

Success for imeem—not to mention a slew of other Web 2.0 upstarts such as iLike, Pandora, Slacker, and SpiralFrog—doesn't necessarily mean bad news for Apple. People may listen to music on these sites on their PCs, but then purchase them from iTunes to ensure they can be played on an iPod.

Does Music Come with Those Minutes?

Still, the rising interest in non-iTunes sites gives hope to competitors that do aspire to dent Apple's market share. On Dec. 5, cell-phone giant Nokia (NOK) announced that many of its new phones would come with a "Comes with Music" service that lets them download as many songs (BusinessWeek.com, 12/4/07) as they want for free, for a year.

Then there are music subscription service providers that charge a monthly fee for access to vast quantities of music. While demand for subscription services has failed to match expectations so far, many industry experts think that subscriptions may end up as a mass-market phenomenon. With more people having access to broadband networks, it's becoming more feasible to give them access to their music anywhere, at any time.

The trick will be convincing labels to lower their prices so that subscription services cost less than $5 a month—and educating consumers as to why they'd want to pay for something many people get for free or in cheap bite-size chunks from iTunes. "People spend $10 a month to get an extra 400 minutes on their cell-phone plan," notes Bob Kohn, who founded eMusic in 1997 and now runs RoyaltyShare, which processes music royalty payments. "Why wouldn't they spend that to get access to all the music that has ever existed?"

Of course, no company has more marketing, design, and brand power than Apple to make one of these alternate models work. Indeed, even rivals admit that Apple CEO Steve Jobs still holds most of the cards. In the time it takes to give a keynote speech, Jobs could embrace and exploit these emerging models. And let's say Apple does lose its chokehold on online music, and it becomes a commodity that flows easily across devices and services as easily as e-mail does today. Even then, its hardware preeminence might enable it to sell more, not less, of its products. "Apple's never been in the music business; they're in the iPod business," says one admiring rival. Having won the hearts of millions of new customers with its iPods, iPhones, and Macs, "they've already won. At the end of the day, does Apple even care if you buy music from iTunes?"

Burrows is a senior writer for BusinessWeek, based in Silicon Valley .