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Tue, Aug 31, 2004 - Page 12 News List

Microsoft gets tuned up to launch online music store

INTERNET SALES The software giant's move into online music is similar to the strategy that has won it success in the Web browser and game console markets


When Microsoft unveils its online music store later this week, the first song offered should be Dave Brubeck's "It's Deja Vu All Over Again": For Microsoft, taking a trail blazed by others -- then trying to dominate the market -- is a familiar tune.

With the opening on Thursday, Microsoft will land itself in a market that Apple Computer pioneered more than a year ago with its iTunes online music store. That's much the same way that Microsoft took on Netscape in the Web browser business and Sony in the market for console game machines.

As a storefront on the MSN online service, Microsoft's music service will offer song tracks for downloading to personal computers and portable music players.

Granted, the market for online music today is tiny, accounting for less than 2 percent of all music sales in the US. Even five years from now, online sales are expected to account for 12 percent of a US$1.7 billion domestic market.

"For Microsoft, it's like Slate, not Xbox," said David Card, research director of Jupiter Research, referring to Microsoft's foray into online magazine publishing, which is considered a tiny business within the company. "It's a pretty small opportunity right now."

But music is only part of Microsoft's strategy. The company has timed the store opening with the release of a new version of Windows Media, the software that allows consumers to play movies, songs and other content on a variety of devices running a version of the Windows operating system. With Windows Media and the online music store, Microsoft hopes to further its efforts to make Windows a foundation for its reach beyond the desktop and into the living room.

The launch also comes as MSN is finally turning the corner. The service has begun making a profit for the first time, after losing money consistently since it was introduced as the Microsoft Network in 1995. For the fiscal year that ended in June, the unit posted an operating profit of about US$200 million, compared with a loss of about US$531 million last year.

But regardless of MSN's success, Microsoft will face a strong competitor in the online music market. In 16 months, Apple has managed to capture almost 70 percent of the market for digital music downloads, according to Forrester Research. And iTunes has helped Apple sell its iPod, the portable music player compatible with iTunes. Last month the company announced it had sold its 100 millionth song -- a milestone that did not come as quickly as the company had originally projected.

The rest of the market for online music downloads is shared by Sony, RealNetworks, Napster from Roxio, MusicMatch, the Wal-Mart Stores Web site and a long list of others, "all fighting for the scraps that Apple has left behind," said Josh Bernoff, a market research analyst at Forrester. Yahoo, Virgin Records and MTV, a Viacom unit, are all expected to join the fray within the next few months.

Given just how fragmented the market is, MSN's 8 million subscribers could quickly allow Microsoft to grab second place, Bernoff said. That's the spot that has been held for the past few weeks by RealNetworks, a longtime Microsoft adversary that has both a music download store and a subscription-based streaming music service.

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