Looking to Play a Different Tune

With 99-cent music downloads moving quickly from novelty to commodity, Full-Audio Corp. needed to set its online store apart.

So along with the standard layout of hit albums and popular songs, its MusicNow site features exclusive anthologies -- such as “Shaken, Not Stirred,” a collection of songs from James Bond movies, and “Mullet Rock,” featuring bands with bad ‘70s hairdos.

By contrast, audiolunchbox.com doesn’t peddle any hits, or even any flops, from the major record companies; the founders couldn’t afford the labels’ licensing fees. Instead, the store stands out online by offering an array of tunes from independent labels, including Epitaph Records and Barsuk Records. And unlike all its competitors, it puts no limits on what shoppers can do with the songs they buy.

“We’re very focused on differentiation,” Audio Lunchbox Chief Executive Morgan Harris said. “For us to go head to head with somebody who has million-dollar advertising budgets doesn’t make sense.”

That’s a common sentiment these days among companies racing to enter the downloadable music market.

At least eight online music stores have been launched this year, most of them by small firms like Audio Lunchbox of Manhattan Beach and FullAudio of Chicago. The number of stores is expected to double in the next few months, including from such commercial behemoths as Sony Corp., Microsoft Corp., Wal-Mart Stores Inc. and Viacom International Inc.’s MTV.

Getting music free -- and illegally -- has proved to be one of the most popular applications of the Internet Age. Now, as companies large and small launch their stores, they must persuade fans not only to buy music but also to buy it from them.

Analyst Phil Leigh of Inside Digital Media, a technology research firm, likened the situation to the early days of the Gold Rush. Most stores have been able to carve out promising niches, he said, but may not be able to hold on to them as more companies elbow their way into the market.

“When there’s no more virgin streams to stake, people are going to be jumping each other’s claims, and it’s going to be ugly,” Leigh said.

Most of the stores are expected to offer nearly the same selection of songs for about the same price, with the same restrictions on copying. That will make it difficult for companies to distinguish themselves, giving an immediate advantage to the players that already attract sizable numbers of music fans.

To make matters worse, small profit margins mean that online stores will need high volumes to succeed. Downloadable music sales have been minuscule in comparison to CD sales or illegal downloads.

The leading outlet for 99-cent downloads has been Apple Computer Inc.’s iTunes Music Store, which has sold more than 17 million tracks since opening April 28. That’s less than 1% of the music industry’s U.S. sales during the same period. (And it’s a barely measurable fraction of the downloads on Kazaa, the biggest online file-sharing network.)

“Our focus isn’t to get rich overnight with this thing,” said Harris of Audio Lunchbox.

Harris said the idea for the store grew out of the work he and one of the store’s co-founders, Joshua Forstot, do at Hyfn Inc., a Manhattan Beach technology company. Numerous record labels promote new bands or CDs by distributing free songs in Hyfn’s music-playing software.

A Change of Plans

The original plan was to let people buy songs through Hyfn’s players, Harris said, but the major record labels wanted advance money the self-funded company couldn’t afford. Nor did Audio Lunchbox’s crew agree with the labels’ insistence that songs be wrapped in electronic locks to limit copying and deter piracy.

“It’s hard enough to get people to purchase music digitally,” Harris said. “They should be able to burn it and listen to it on as many computers or MP3 players as they want.”

Hence the company’s focus on independent labels, many of which have no qualms about using unlocked formats such as MP3 and Ogg Vorbis. The store launched last month with about 17,000 tracks from 36 labels, and it hopes to have more than 100,000 tracks from a wider lineup of partners by year’s end.

That’s a small catalog. Roxio Inc.’s Napster store has half a million tracks, and that total pales in comparison to the billions of tracks that have been released on CD.

For its part, FullAudio is counting on alliances with Microsoft and Best Buy Co. to introduce people to the MusicNow store and subscription service. Its software is an optional add-on to Microsoft’s Windows Media Player (as is Roxio’s), and the store is featured in Best Buy’s retail outlets and on its Web site.

What sets MusicNow apart, though, are the compilations, or “track packs,” its staff creates. Examples include collections of music from Looney Tunes cartoons, unfamiliar renditions of familiar songs and tracks nominated for this year’s American Music Awards.

The often-clever mixes embrace the typical downloader’s interest in plucking songs from multiple albums rather than buying artists’ whole CDs. But unlike with a single artist’s release, there’s no volume discount -- it’s a straight 99 cents per song.

Greg Rudin, FullAudio’s vice president of marketing, said making people aware of legal downloads was job No. 1; standing out in the crowd would take time. “Let’s face it,” he said, “personality doesn’t develop overnight.”

For some download ventures, such as Cupertino, Calif.-based Apple’s iTunes and the forthcoming Sony venture, a key personality trait is tight integration between stores, software and portable players. Others, such as Napster, FullAudio and the expected entry from RealNetworks Inc.’s Rhapsody, link their stores to subscription services offering unlimited music rentals for a flat monthly fee.

Internalizing the Stores

Another approach is to embed a store into Internet access software, as Time Warner Inc.’s America Online is expected to do next summer, or into the programs people use to play CDs and MP3 files on their computers, as San Diego-based MusicMatch Inc. and Apple have done.

Industry executives credit Apple and its chief executive, Steve Jobs, for sparking the explosion of interest in download stores. A smattering of online sites have tried selling downloads since the late 1990s, but Apple’s iTunes was the first to make it easy to browse, buy, burn and transfer downloads to a portable player.

Another significant factor has been the major record companies, which stifled the online music business for several years with unrealistic prices and draconian restrictions on what people could do with downloaded songs. No longer trying to dominate the Internet with their own services, the labels have gradually made their licensing terms more favorable to independent companies and have started welcoming online partners.

That reflects a growing realization among music label executives that illegal downloads, not legal ones, were the prime threat to CD sales. But it also is a response to Apple’s store, which quickly quadrupled the sale of downloadable tracks even though it worked only on Macs. Apple released a version for computers using the Windows operating system last month.

Nielsen SoundScan, which tracks music retailers, has reported a steady increase in the sale of 99-cent downloads since August. Nevertheless, the small overall market suggests it will be hard for many to survive in the crowd of download vendors.

Audio Lunchbox’s Harris is happy to see a growing number of players jump in with offerings dominated by major-label music.

“With all of these new stores popping up, how do they expect to make any money?” Harris asked. “I think they’re all going to kill each other off eventually.”