Price War in Online Music

RealNetworks Targets iTunes
With 49-Cents-a-Song Sale;
A Taste of What's Ahead?

By NICK WINGFIELD
Staff Reporter of THE WALL STREET JOURNAL

Online-song shoppers now have two new words to sing about: price war.

As part of a mounting campaign against market leader Apple Computer Inc., rival RealNetworks Inc. is slashing the cost of downloading music. Starting today, and for the next three weeks, the Seattle company, which sells tunes over the Internet via its RealPlayer Music Store, will drop its prices to 49 cents a song and $4.99 an album. That's compared with the 99 cents a song and $9.99 an album that is standard on Apple's iTunes Music Store and on other sites. The price cut amounts to a music sale of massive proportions because it applies to all 630,000 songs on the RealPlayer Music Store and most of the albums available on the site.

The move is a surefire money-loser for RealNetworks in the near term because it will be charging consumers substantially less than it pays recording companies for the music. But RealNetworks is using the sale to highlight its broader effort to unseat Apple, which by some estimates has a 70% share of music-download market.

The sale, which lasts through Labor Day, provides a taste of how consumers could benefit as more big companies, notably Microsoft Corp., pile into the music market in the coming months. Microsoft is expected to begin selling music over the Internet as early as this fall, though it hasn't said how much it plans to charge for songs and albums. Yahoo Inc. has similar plans, further ratcheting up the competition that existing players such as Musicmatch, Sony Corp. and Napster will face.

Singing a new tune: One of the new ads that RealNetworks is running to appeal to Apple's customers.

As in many other industries, the digital-music market has become commoditized as a result of intense competition. Outside of sales and other limited promotions, there is now little variation among the major music sites in price or tune selection.

RealNetworks is especially eager to draw attention to a technology it launched several weeks ago called Harmony. It lets users translate songs purchased from the RealPlayer Music Store into a format that can be played on the iPod, Apple's hit portable music player, and on devices that use a competing Microsoft format. That covers most of the portable music players now on the market.

Apple designed the iPod so that iTunes is the only mainstream music site with which it is meant to work. (Users can also puts songs on their iPods that have been copied from CDs or downloaded through file-sharing programs.) But RealNetworks figured out a way to work around Apple's technical restrictions, saying it wanted to give iPod users more options for buying music. The move prompted legal threats by Apple; RealNetworks says it is confident it didn't break any laws.

All of this highlights a potential vulnerability for Apple moving forward. The company's economic success in the music business is premised in part on the idea that its customers will continue to buy iPods and purchase music online from iTunes. If these customers at some point want to switch to another portable-music player, their music collections may not be playable on those devices unless they buy songs from RealNetworks or go through the tedious process of burning all their music onto CDs and copying them back to their PCs.

Rob Glaser, chief executive officer of RealNetworks, said in an interview yesterday that the price cut "is an opportunity to get this message out to wider audience."

An Apple spokeswoman didn't return a call for comment.

To drive Mr. Glaser's point home, RealNetworks is taking out advertisements in daily newspapers, alternative newsweeklies and magazines that tout the 49-cent sale and the broader music-player options its customers have compared with those who buy songs from Apple. "Half the price of Apple. Welcome to freedom of choice," the print advertisements say. They also feature an illustration of an iPod altered to look like an open padlock.

It's unclear whether the RealNetworks' move will trigger a wider, sustained price war. One big reason others may shy away from such tactics: There's no better way to lose money. RealNetworks and other companies say their gross margins on song sales are usually about 10%.

By selling songs for 49 cents a pop for the next few weeks, RealNetworks will be losing about 40 cents on every song it sells. The company plans to tell investors its music fire-sale could directly subtract about a penny a share, or about $1.8 million, from its third-quarter bottom line.

The company's long-term hope is that the sale will sway users to sign up for its subscription entertainment services such as Rhapsody, a music service that charges users $9.95 a month to listen to an unlimited amount of the music on their PCs (not on portable players though). Subscriptions music services are more profitable than selling songs for 99 cents each.

This isn't the first attempt at discounting online music. For months, Wal-Mart Stores Inc. has sold songs through its Web site for 88 cents each, but it has failed to make a noticeable dent in Apple's business. RealNetworks' discount on music, though, is substantially deeper than past price cuts by mainstream music sites. The company is charging about a third of the price for typical music CDs in retail stores.

Apple's lead in the music market won't be easy to crack, though. The company says it has sold more than 100 million songs through iTunes -- tens of millions more than any of the competing sites. Company CEO Steve Jobs has conceded that iTunes isn't a big money-maker on its own, but he says the site helps Apple sell iPods, which carry healthy profits for the company. The company has sold more than three million of the devices, with price tags between $249 and $399.