ITunes’ rivals may lift Apple

Times Staff Writers

As competitors challenge Apple Inc. in digital music, the biggest beneficiary may be Apple.

Wal-Mart Stores Inc. and RealNetworks Inc. on Tuesday strengthened their digital music offerings to better compete with Apple’s iTunes store. Wal-Mart began selling songs without anti-piracy locks for 94 cents apiece, and RealNetworks’ Rhapsody subscription service announced new partners that would promote it on MTV and distribute it on Verizon cellular phones.

But the competition might actually help Apple. That’s because the Cupertino, Calif., company makes a slim profit on selling songs but cleans up on every iPod music player.

A robust market for digital songs should translate to more demand for the music players on which to play them, and Apple’s iPod is the runaway leader.

“ITunes was developed to promote iPod hardware sales,” said Susan Kevorkian, an analyst at research firm IDC. “The introduction of services that offer digital music to the installed base of iPod users will help drive more iPod sales.”


Wal-Mart, the No. 1 overall music retailer, noted on its online store that the songs in the unrestricted MP3 format would “play on almost all portable media devices, including Apple iPod and Microsoft Zune.” The initial batch of MP3s are coming from major labels EMI Group and Universal Music Group.

“Certainly the ability to buy music in more places helps Apple,” Pali Research analyst Richard Greenfield said. “They make very little money on iTunes transactions, and they make a good amount of money on iPod transactions.”

ITunes is facing new competition, especially from rival download stores. Universal, the world’s biggest music label, said last week that it would supply a slew of those, including Inc.'s store.

Subscription services, on the other hand, haven’t taken off. Rhapsody claims to be the most successful, but RealNetworks’ 2.7 million subscribers include Internet radio customers.

Rhapsody offers those who pay $12.99 or more monthly unlimited listening and the chance to buy tracks for as little as 89 cents each. Without burning them onto a CD and then ripping them back to a computer, though, those songs can’t be played on the iPod.

RealNetworks’ stock has been pummeled as Apple has prospered. Even after jumping 45 cents to $6.30 on Tuesday, the shares are down 42% this year.

Under the plan just announced, RealNetworks would own 51% of a new company, Rhapsody America, with the rest belonging to Viacom Inc.'s MTV Networks. RealNetworks is contributing cash, employees, contracts and customers.

MTV would invest cash and provide a $230-million loan over the next five years, and the new venture will buy at least that much advertising on MTV channels including flagship MTV as well as VH1 and country music channel CMT.

MTV also plans to transfer users of its Urge digital service, developed with Microsoft Corp., to the new service.

“By putting these services together, they have a stronger service,” said analyst Josh Bernoff of Forrester Research. But he noted that songs through the Rhapsody subscription service don’t work on the iPod.

Another sign of Apple’s growing importance is the participation of cellular service provider Verizon Wireless in the Rhapsody deal. Executives at the three companies said Rhapsody America customers would be able to listen to their songs on their Verizon phones.

With many new ways to buy digital music emerging this year, confusion will be commonplace, said David Card, online music analyst at Jupiter Research.

But all the confusion will probably lead to the simplest solution, which is music in the unrestricted MP3 format popularized by unauthorized file-trading programs, Card said.

And the more MP3s on the market, the better shape the iPod will be in.