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Last Updated: Wednesday, 7 September 2005, 21:17 GMT 22:17 UK
Download wars heat up
By Jeremy Scott-Joynt
BBC News business reporter

Sir Richard Branson launches Virgin's digital music download service
Sir Richard appeared by hologram to launch Virgin's service
In the UK, the download wars are hotting up as the High Street heads online.

Recent days have brought two of the biggest names in music retailing, HMV and Virgin, into the online music market - challenging the current dominance of computer and software firms such as Apple Computer's iTunes.

But the biggest move is less about the identity of the new competitors, and has more to do with the way they plan to sell their music.

The headline service both offer depends on customers buying an all-you-can-eat monthly subscription. Users will be able to download almost any track available and keep listening to it - but only as long as the monthly 14.99 payment continues.

Stop, and the music disappears.

Pitched at the fanatics

This stands in sharp contrast to the iTunes model, where everything is pay-as-you-go.

Sir Richard Branson, whose Virgin Group launched Virgindigital.com on 2 September, acknowledges it's a relatively new model for the UK - and that the alternative, coughing up a flat rate of 79p a tune, is likely to persist.

"Will subscription work? I don't know," he says in an interview with the BBC News website. "The people who are music fanatics may be willing to do it. Those who aren't may prefer the 79p method."


In the US, subscription services - albeit much cheaper ones, such as Yahoo's which costs as little as $5 a month - have carved out a niche.

Subscription's still fairly marginal - and it's a complicated sell
Paul Brinkley, MusicAlly

However, neither Virgin nor HMV are betting on subscription being the way forward.

"It's still fairly marginal... and it's a complicated sell," says Paul Brinkley, managing director of music industry research firm MusicAlly.

In a recent survey, MusicAlly found people preferring pay-per-tune by a sizable margin - with the prospect of losing the music unless the payments continue the biggest turn-off.

"It's a completely different ballgame, because of the emotional commitment that ownership of music carries with it," Mr Brinkley says.

So HMV, as well as Virgin, is offering pay-as-you-go downloads as an option - and in HMV's case the price can be varied by the record company, a system the store suggests could be used to promote new artists.


Virgin is also offering an alternative; a cut-rate subscription - for 9.99 a month - aimed at those who only want to listen to the music on a computer, rather than downloading it onto a portable device.

iPod advertising
The iPod still rules the music device market

Record companies, according to Mr Brinkley, ask for much higher prices to allow their music to be portable than they do for a "tethered" service tied to your computer.

Neither HMV's nor Virgin's music, incidentally, will work out of the box on Apple's iPod music player, which still dominates the market for such devices.

This, Mr Brinkley says, could prove embarrassing for HMV - which still sells iPods in its stores, and may have to explain to buyers how its own service isn't compatible.

"The main difficulty is going to come when the poor, unsuspecting consumer downloads a track and then finds they can't transfer it onto their iPod."

His view is that as long as Apple's player is tied to its own online store - and as long as the Windows-only alternatives remain more than a little unreliable - portability is going to be a minority option for the non-Apple players.

On the go

That said, there may be an alternative.

Some people see the mobile phone, not other music players, as the iPod's true competition.

Indeed, Apple - with Motorola - is bringing out a phone with what is effectively a cut-down iPod built in.

More and more phones come with the - albeit somewhat clunky - ability to play music. Once usability improves, their market share is likely to grow.

However, there's a big issue yet to be settled in the music download market: the cost.

It could be that, in time, we can persuade record companies that the argument for different pricing goes away
Sir Richard Branson, Virgin

Mobile phone companies have thus far been less than keen to share too much of their revenue.

If music is to be downloaded directly to mobile phones rather than via a PC, Sir Richard acknowledges that mobile phone operators "will have to get phone companies used to taking a penny or two... the same margin as iTunes (and its rivals)".

Counting the costs

None of which solves the other half of the cost equation: the fact that at present, record companies take by far the biggest slice of the fee for a download or a subscription.

For the likes of Yahoo and Apple, that's not too much of a problem: Yahoo wins customers for its other services, and Apple can sell iPods on the back of iTunes.

For HMV and Virgin, in contrast, their business is selling music - and the margins online are pretty slim.

Not, according to Mr Brinkley, that they have a choice.

"They know the future is about delivery via new platforms," he says, "but in the short term it's very unlikely they would be making much money from these services."

HMV store on Oxford Street, London
Do downloads spell the end of the record shop?

Added to which, the uncomfortable truth is that the costs are generally much higher on this side of the Atlantic than in the US.

Sir Richard defends this differential, pointing out that artist development costs remain high and that the market in the UK is much smaller.

But that fails to take into account the vastly-reduced cost of delivery - no CDs mean no pressing, no storage, no delivery.

"The music industry wants to make the same margins as on the physical product," Sir Richard says. "It could be that, in time, we can persuade them that the argument for different pricing goes away. I will try to make that argument to the record companies."

There's one problem with that manifesto, however. Branson himself owns a record company: V2, home to Aimee Mann, Elbow, Madness, Paul Weller and the Stereophonics.

"And you can download them all from Virgindigital," he says proudly.

Which means, of course, that if the music industry is charging too much, V2 will buck the trend and lead the way?

"Well, you make a very good point," he concedes. "I must look into it."

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