Microsoft Invades Apple's Turf

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The 800-pound gorilla that everyone was bracing for jumped into the water today as software supergiant Microsoft unveiled its long-awaited music download service.

The service, MSN Music, will launch with a U.S. test version Thursday. Songs will cost 99 cents each, equal to the price that rival Apple Computer charges for songs on its iTunes Music Store. The initial song catalog will amount to 500,000 songs, but will scale up to 1 million, matching Apples offerings within weeks.

Sources familiar with Microsoft's plans say the company has managed to get major record labels to sign on to the service under uniform licensing terms. Among the online music players, Apple is the only other service that has managed this.


Down the road are plans for a music-subscription service that will let customers pay a monthly fee to listen to music they like for a limited time, something akin to video rentals. This feature would use a Microsoft digital rights management technology codenamed Janus that was announced in May.

The addition of subscriptions may prove to be important. While the iTunes-style pay-for-download scheme is the business model of choice, there's evidence that as time goes on consumers show a preference for subscriptions.

"What we have seen is that as people gain experience and become heavy acquirers of digital music, they gradually begin to shift more toward the subscription-based services because they offer more value," says Matt Kleinschmit, director at Ipsos-Insight, a New York-based consumer research firm.

One thing Microsoft's service will be missing is a dedicated hardware tie-in. Apple's main aim in providing the music service--which Apple says is slightly profitable--is to sell iPods. While there are certainly plenty of players on the market that support music encoded to Windows Media, the iPod, far and away the market leader, isn't one of them. Still there are players galore from companies like Creative Labs , Dell , Rio, RaveMP, iRiver and others that will work with the new service.

Apple's iPod supports several formats, but not Windows Media, though Real Networks has released software that lets iPod owners play songs bought from Real's download store.

Other services support Windows Media, including Wal-Mart 's music download site on, Roxio 's Napster, as do and Sony 's Connect music store uses a proprietary music format known as ATRACS.

News of the store will coincide with the release of Windows Media Player 10. But certain Microsoft partners, Creative Labs among them, will start shipping a new generation of hard-drive-based media players that include a small video screen based on a Microsoft reference design.

Still, if the hardware leaves something to be desired, there's very little stopping Microsoft from launching its own branded player, and if past history is any guide, it's willing to put serious cash at risk in order to build a long-term business.

Take the Xbox, for example. As of the end of the July quarter, Microsoft had sold only 15.5 million units compared with more than 70 million for Sony's Playstation 2 console. But with some $50 billion in cash, it has proven itself willing to lose money in order to build a business. For the year ended June 30, Microsoft's Home Entertainment business unit lost $1.2 billion on sales of $2.8 billion.

"They've certainly been in the content game for a long time," says Michael Gartenberg, vice president and research director at Jupiter Research, a unit of Jupiter Media . "While digital music is certainly a long-term strategic business for Microsoft, I see this as more of a tactical move, kind of like their investment in Slate Magazine a few years back."

Still, compared to the multibillion-dollar business of CD sales, music downloads is a small business. As yet Gartenberg says less than 5% of American homes have any kind of digital music player to speak of. And there's the fact that legal downloads still substantially outnumber illegal ones.

Yet legal downloads are gaining traction. Kleinschmit of Ipsos-Insight says that as of April of this year, 37% of 60 million consumers over the age of 12 who are downloading music have paid for it at least once. That's a threefold increase from this time last year. It suggests there is still a developing market that Apple, Microsoft and others can carve up between them over time.

As Gartenberg puts it: "Microsoft is a very patient company."