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Joshua Cho
Now that cable modems and the broadband pipes that serve them are becoming tangible to the general public, media companies are starting to turn their attention to making business models work over these facilities.
And while analysts and executives continue to banter about the much overused buzz word e-commerce, media companies are starting to put a lot of emphasis on downloadable music over the Internet as a place to begin.
Indeed, in a recent Liberty Media Group investors conference held in New York, Liberty Digital president/CEO Lee Masters said, "Music is the next really big frontier on the Internet." And with a nod to how quickly the Internet landscape shifts, he added, "A year ago I wouldn't have said that."
Masters pointed to a "broad array of services, exploitation of digital music downloading technologies and multiple distribution platforms" as reason why music over the Internet would be a robust business.
Another company making noise about music over the Internet is none other than cable music video pioneer MTV Networks, which last month bought the Box, an interactive music video network and a network of music-related Internet sites called SonicNet, from Liberty Media.
MTVN president/COO Mark Rosenthal, in a telephone interview, stressed that the deal was meant to bolster the company's Internet presence.
Rosenthal said that the SonicNet sites-which include SonicNet.com, Addicted to Noise, Streamland, Trouser Press, Cinemachine and Alternative Buyers' Guide-and the Box network will remain as they are for the next few months. But, he added, MTV plans to launch an interactive music channel late this year on cable, which will combine videos with a number of interactive ordering capabilities. It will also go with the launch of a new music Web site. Other acquisitions and deals are likely, Rosenthal said.
Jumping on the bandwagon early this month was America Online, which bought two Internet music companies, Spinner Networks Inc. and Nullsoft Inc., for $400 million in AOL stock.
But at the same time, people in the music industry aren't completely sold on the idea. According to one owner of a New York-based independent record label, the viability of consumers paying for music over the Internet is questionable. The record exec also pointed to the blinding array of new bands that pop onto the scene everyday. With so much choice, it'll be hard for artists and groups to stand out amongst the clutter, he said, and harder still to get someone to pay for unknown bands.
"Plus, people like going to the record store," he said.
Some analysts are cautious as well.
In a Paul Kagan Associates Inc. Internet media newsletter, Kagan wrote, "the creation of a workable business model will be difficult to come by, as many experienced Web users may balk at the notion of one day paying for songs that were universally accessible for free-(that's) the reason we have taken a conservative approach in our projections."
Kagan estimates a "fee paying user" base this year of only 4%, which will grow to 28% in 2008. Annual revenues from downloading music were estimated by Kagan to be $13 million this year, growing to $609 million in 2008.
Portable players of downloaded music, Kagan found, could eventually reach nine million units per year, or another $170 million in sales.
Other analysts like Geoffrey Sands of Booz Allen & Hamilton agree that there are issues that will hamper the growth of online music sales.
"It's not going to roll out as fast as a lot of analysts are expecting," Hamilton said. "One of the issues is the content and availability of online content and online rights."
Hamilton said that currently online content is relatively new and is limited to obscure artists as well as relatively well-known artists who aren't active anymore, such as Canned Heat.
The other issue is broadband access to the Internet.
"Until broadband penetration reaches sufficient numbers, this will be limited to high-end audiophiles and college students with broadband access on campus," Hamilton said.
But the reason companies are jumping on music over the Internet is because of all the revenues that other downloadable digital information may produce in the future. At least that's what some Internet music industry experts say, like Adam Rymer, senior analyst at Webnoize Inside, a self-described research, consulting and think tank division of Webnoize, a media outlet devoted to Internet music.
"What you'll see is that music over the Internet will give confidence to other media. As people begin to have broadband Internet access, you'll be able to show movies over the Internet and other types of media that aren't considered mass media that traditionally you would pay for anyway, such as cable TV shows and pay-per-view," Rymer said. "When you shift from music to video games, for example, it doesn't really change that much in terms of business models or in terms of security, storage capacity, and encryption."
So why is the online media industry starting with music?
"Right now it just so happens that the necessary infrastructure exists that can provide for the distribution of music online," Rymer said. That, he added, is because of music compression technology such as MP3, the most widely used downloadable format today, which can adequately reduce the size of digital music files so they can be transferred over copper phone lines to Internet users.
Ironically, MP3 was created years ago by a group called the Motion Pictures Experts Group who came together to create standards for the compression of digital video and audio. It was first widely exploited by college students who used the compression technology to convert CD tracks to a format that could be transferred over the Internet, usually for free.
When a company called Diamond Multimedia came out with its Rio portable player for MP3 files, the giant record labels suddenly woke up, leading to the formation of the Secure Digital Music Initiative (SDMI). Similar to DOCSIS, SDMI's role is to come up with the open standards for downloadable music in terms of copyright protection, licensing and, more importantly, how to charge a user for downloading the latest Beastie Boys single, for instance.
At the same time, a number of companies set out to create their own Web music player technology, including household names like AT&T Corp. with its a2b player, Microsoft Corp. and its Windows Media and RealNetworks with its RealPlayer. Other companies that currently offer players include lesser-known companies like Liquid Audio with its Liquid Player and the recently acquired Nullsoft with its Winamp. And besides the Rio portable MP3 player, which looks somewhat like a pager, new players such as the NOMAD digital audio player have been introduced.
Analysts like Michael Wallace of Warburg Dillon Read say that it's the proliferation of these players that points to the success of the Internet music business.
"There are now over 50 million players being used," Wallace said. "That turns into a gateway to audio and video that will be leveraged."
And in keeping with Internet businesses these days, a number of Internet music companies have gone public or announced plans to make initial public offerings within the past month.
But while SDMI grapples with the standards, analysts say that some companies will try to exploit the market that's already out there. Booz Allen Sands said that he expects some announcements and/or products relating to online music to accelerate toward the end of this year as we get closer to the holiday shopping season.
But another hurdle that has to be crossed, the analyst says, is the pricing model. Currently, one public Internet music company, Emusic.com, charges around $9 for an album in MP3 or RealAudio format and 99 cents for individual songs. Sands says that it's still not clear that this is the de facto pricing model but that it'll probably be sufficient for the holiday season this year.
"I think it'll be an attractive, but still relatively small business by the holiday season," Sands said. "Beyond that, in the online and Internet world, who knows?"
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