MySpace May Change Apple's Tune

SAN FRANCISCO -- Apple(AAPL) may have surpassed its rivals to become the No. 1 music retailer in the U.S., but its market-leading position may not be entirely secure.

Online networking site MySpace said Thursday it will launch its own music service, in partnership with three of the biggest record labels: Vivendi's Universal Music Group, Warner Music Group (WMG) and Sony BMG Entertainment, a joint venture between Sony(SNE) and Bertelsmann, in a move that could potentially give Apple's iTunes service a run for its money.

Unlike Apple rivals Wal-Mart( WMT) and Amazon.com(AMZN), which sell music that's indistinguishable from that offered by Apple iTunes, MySpace has built its reputation as a place to discover and experience new music.

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For instance, hip-hop artist Kanye West's MySpace page has bagged 36.7 million page views to date, while rapper 50 Cent boasts a running total of 40.4 million views. From artists Mika to Madonna and even smaller independent musicians, most have a page on the popular networking site that offers regular updates on the artists, videos and music clips.

That kind of community support and a willing audience could make MySpace's plans to offer advertising-supported and free music a serious threat to iTunes.

"The fact that most musicians have their MySpace pages that are extremely popular underscores the promise of the service," says Phil Leigh, a senior analyst with market research firm Inside Digital Media.

Revenue from iTunes, which Apple doesn't disclose, is estimated to be a very small percentage of the company's business. Still, analysts watch iTunes closely because of its tight integration with the iPod.

Growth in the portable music device has been a big concern for investors after Apple's recent first-quarter results showed that sales of the devices grew just 5% in the quarter and were almost flat in North America. Apple sold 22.1 million iPods last quarter.

Sluggish sales of the iPod, along with fears that a slowdown could impact spending on Apple products, has taken a toll on the company's shares. The stock is down nearly 25% since the beginning of the year. However, it had been down 50% this year before bouncing back in the past five weeks.

Losing its music-sales leadership could be dangerous for Apple -- and shareholders -- because it could signal that some users may be turning to alternate forms of music consumption, leading potentially to a further decline in iPod sales growth.

MySpace's agreements with three record labels also underlines the efforts by labels to break iTunes' stranglehold on the business and create alternatives.

"The labels are trying to reduce the influence of iTunes," says Leigh. "Now that the labels have abandoned DRM (the digital rights management restriction that limits usage of digital media), they are beginning to take constructive steps to utilize the Internet to their advantage."

MySpace's music service announcement comes as Apple surpasses Wal-Mart, Best Buy and Amazon to become the No. 1 music retailer in the U.S., based on data from market research firm the NPD Group.

MySpace Music is scheduled to launch in the next few months, although the News Corp.(NWS)-owned site didn't offer details on pricing of downloads, except to say it would be "very competitive."

MySpace's move could also offer the music recording industry more ways to profit off their music. Unlike radio stations that have relied on music for their popular content yet don't share ad revenue with the record labels, the MySpace deal could offer the recording industry a new way to share profits from digital music and break Apple's stranglehold on online music, says Leigh.