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JULY 6, 2004
By Eric Wahlgren Europe Hears Apple's Song iTunes Music Store made a loud debut on the Continent and it could boost iPod sales, but drowning out rivals won't be easy Guten tag, iTunes Music Store! Apple's online-music venture got a warm welcome in Europe, selling 800,000 songs its first week after a June 15 launch in France, Germany, and Britain. It took months for On Demand Distribution (OD2) -- the long-standing European leader in music downloading founded by rock star Peter Gabriel -- to sell as many tracks when it opened shop four years ago, analysts say. Claims by Apple (AAPL ) chief Steve Jobs that iTunes Music Store's performance in the first week makes it "Europe's top online music store" may be premature. But "the launch was very successful," says analyst Charles Wolf, a principal at Needham & Co. in New York. "THE THING TO JUDGE." The real test of iTMS' move into Europe will come in six months to nine months, says Mark Mulligan, a senior analyst with Jupiter in Britain. That's when Apple should have iPod's holiday-sales results -- and that "will be the thing to judge" on whether real profits are possible, says Mulligan. iPods are the only digital music players able to play songs downloaded from iTMS. Mulligan believes, though, that Apple did its homework. "It's an American-based business that has launched very European-based services," he says. Stateside, iTMS tops the charts. The music store, which Cupertino (Calif.)-based Apple rolled out on Apr. 28, 2003, has a 70% share of the market for paid-music downloads. These days, iTMS peddles some 2.7 million songs a week in the U.S., according to Apple. The service doesn't make a lot of money for Apple. Wolf estimates iTMS earns only a few pennies off each downloaded song. What iTMS does, however, is help drive sales of the pricey iPod player, which made up about 14% of Apple's $1.9 billion second-quarter sales and, at this point, is Jobs & Co.'s fastest-growing and highest-margin product. ATTRACTIVE EASE. Is it a no-brainer that iTMS' success in the U.S. will translate into dominance in Europe? The service has several things going for it, analysts say. For starters is its tie to the iPod music players. The sleek devices are also popular in style-conscious Europe. Indeed, the gadget's designer is European: Jonathan Ive, a Brit. About a third of iPod's $264 million in sales in the second quarter came from overseas, with the bulk of that from Europe, Wolf says. Such sales are remarkable, as iPods in Europe carry even higher price tags than in the U.S. The iPod mini, a slimmer but only slightly trimmer-in-price version of the "white" iPod, is finally due out in Europe sometime in July. Just as in the U.S., Continental demand for iPods will be expected to fuel demand for iTMS, and vice versa. "Apple is going into the [music downloading] battle with the best software and the best music player," says Wolf, who owns Apple shares. The same mix of easy-to-use software and uniform pricing that made iTMS a hit in the U.S. should also play well in the Old World, says online music expert Phil Leigh, president of Inside Digital Media in Tampa, Fla. iTunes is selling songs for 0.99 euros (about $1.20) a piece on the Continent and for 79 pence (about $1.43) in Britain. "CLOSED ECOSYSTEM." iTMS' main European competitors, OD2 and Napster, which debuted in Europe in May, have trickier pricing schemes, Leigh says. "If I go to OD2 or Napster, I have to check the prices," he says. "If I go to iTunes, I know the prices are all going to be the same." Still, the battle may be tougher than Apple thinks. Europe's rival music services are hardly going to roll over and play dead. OD2, based in Bristol, England, recently agreed to be bought by Seattle-based Loudeye (LOUD ) for about $38 million. OD2 doesn't compete directly with iTMS. Instead, it provides enabling software and the music library for others such as MTV and Microsoft's (MSFT ) MSN to go head-to-head with Apple's downloading service. Jeff Cavins, Loudeye's president and chief executive, says iTMS's entry is healthy for the European market because it brings "a renewed sense of urgency among our customer base" to develop digital music and media sites. There's room for companies with different offerings besides iTMS's one-price-for-all format, he adds. "iTunes is a closed ecosystem," Cavins says. "Your iTunes music is only available on your computer or your [iPod] device." Songs downloaded from iTMS can also be burned onto CDs.
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