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Summary:

Business 2.0: Online music is the one thing that will compel consumers to pay for bigger pipes to the home. [Link for PDF version] Apple (AAPL), Microsoft (MSFT), RealNetworks (RNWK), and Sony (SNE) are fighting like cats and dogs over a dollar-a-download business that will soon […]

Business 2.0: Online music is the one thing that will compel consumers to pay for bigger pipes to the home. [Link for PDF version]

Apple (AAPL), Microsoft (MSFT), RealNetworks (RNWK), and Sony (SNE) are fighting like cats and dogs over a dollar-a-download business that will soon turn into a financial migraine of the worst kind. As that happens, consumers will find high-speed Internet service indispensable.

Back when the original Napster was all the rage, we saw a sharp increase in the number of broadband users. That’s because most of them wanted to swap files with each other. Many Napster users discovered that while a 56-kilobits-per-second dial-up connection was good enough for e-mail, it lacked the oomph needed for trading big music files.

Expect an encore as the barrage of advertisements from online music services such as MSN Music and iTunes creates a desire for ever faster connections. Nearly 63 million Americans, or roughly 51 percent of U.S. Internet users, already access the Web over high-speed connections. Downloadable music is expected to be a $1.7 billion business in 2008. What will happen when newbies sign up for these services? They’ll discover, as the Napsterheads did, that they need higher speeds to quickly get the latest 50 Cent single.

Downloadable music, however, will be just one catalyst of the broadband explosion. Take online radio, for instance. Online streaming radio stations have been around for years, but now the sound has improved to almost CD quality. Customers don’t even need computers; they can buy devices that stream Internet radio directly over high-speed connections. But they have to have broadband.

Every day there are new online applications that allow people to form communities or fan clubs to share playlists. Other free services, such as Mercora, enable consumers to easily set up their own nano-radio stations and share them with family and friends. These services are going to mirror the growth rates we saw with instant messaging. Think IM changed kids’ lives? Music will do the same for both them and the older folks, making the Internet an even more integral part of our digital lifestyles.

We’ll see if the demand is intense enough to induce companies to build out the broadband infrastructure, at long last, to match the big 50-megabits-per-second pipes that the Japanese and Koreans have. Then movies, which are broadband’s next killer app, can flow as freely as iTunes.

  1. Yes, and as all these companies rush to create this killer app, one of the tech companies will realize, “Hey, we can’t make any money doing this. We have to pay for all this infrastructure, security software, transactions, bandwidth. The only ones making money are the content companies.” And this picture of a huuuuuggggee business that would save technology companies will become yet another footnote in the work between tech and content.

    Tech company + media distribution = loss for tech company because the costs for the media are too high and the labels/film companies aren’t about to lower them. Let’s add to that the fact that there is no owning the customer on the internet. Real had MLB content, and then it went to another company, and those customers went there. For non-exclusive content, like music, it’s even harder. One music store, eventually, will be like the rest.

    Apple isn’t making any money on iTunes. It’s using it to sell iPods. Microsoft is just using it as a way to get more people to use their mobile OS. But none of these guys are going to make much off of this business. Sony might do well if they could get their head out of their ass – because they own the content. And Real, well, they should just call it a day and return the money they have left to the shareholders.

    And besides – why is music suddenly the killer app? It’s been the killer app of broadband since around 2000.

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  2. Damian you make good points but miss my point. sure it has been a killer app since 2000 but for those in the geek realm. it is going to grow way bigger in next 24 months. more marketing dollars for itunes and msn music mean more awareness for moms and pops. so it becomes an even bigger killer app which is used by more and more people

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  3. Ah – I see your point. I think it’s more of an audience segmentation thing. Younger people will think of broadband and music together, older people will take more work and may never get it – after all, a great deal of older people still can’t set up a DVD player. So, it will grow bigger, but by how much over the next 24 months I can’t tell you.

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  4. As always you are making great points, and I think it is going to be interesting to see how it plays out. I do agree that market is going to segment. I think that is why people gravitate towards Ipod, because it helps them over come the fear of the technology. I think anyone who develops an application which is simpler and easier to use, well you are off to the races. anyway I am thinking more and more about this stuff.

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  5. Take a look at this note: http://www.theregister.co.uk/2004/09/17/92percent_prefer_cds/

    The continued purchase of CDs points to the segmentation of the audience. Remember – these things take years, but rarely does a new technology completely replace an old one. Usually, the technologies combine.

    Also, remember that, when quoting the size of the overall music marketplace, that getting even 10% of the total music spend online would be a huge achievement. I remember when Amazon first appeared, someone pointed out to me that the total catalog business in the US is around 12% of retail. And Amazon (along with EBay), which affectly replaced a great deal of that business but e-commerce, I believe, still comes in at something like 12-14% of total retail sales (can someone update that number?). As always, comments welcome!

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  6. Is there any discussion about what happens when content CREATORS realize that broadband allows them a huge distribution audience w/o all that fuss and muss of signing over ownership of their creations to a huge media corporation? Talk about fragmentation. But at least monstrosities like the RIAA will be a historic footnote at last. Well, we can dream, can’t we?

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  7. [...] is not just the small webcasters who are going to be impacted by this attack on one of Broadband’s killer apps. Some music start-ups like Last.fm and Pandora – could find themselves facing higher tabs and tough [...]

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