Online Music Hitting False Notes

Updated from 11:17 a.m. EDT

The online music business is booming, but is anybody making real money at it?

If you're doing the actual selling of music -- or music subscriptions -- to consumers, the short-term answer appears to be not much. Competition, marketing expenses, a faulty business model, slow-changing consumer attitudes and the use by some companies of music as a lure to sell other goods and services have all conspired to keep the business largely in the red.

And that's not likely to change anytime soon, no matter -- or arguably because of -- how many millions of songs Apple Computer (AAPL) sells through its iTunes music store, analysts say.

"It's a long-haul business right now," says Aram Sinnreich, managing partner of Radar Research, a Los Angeles-based consulting firm. "It will be at least three years before anyone can make a serious profit selling digital music," largely because of the hold that Apple has on the market.

And even then, Sinnreich says, making money will require some serious changes in the way consumers are buying online music.

"Nobody will ever make money from selling 99-cent downloads" as Apple does through iTunes, he says. "There's not a margin in it."

Regardless of what's happening on the bottom line, though, companies are certainly seeing huge growth in digital music sales. The Recording Industry Association of America, for instance, estimates that the U.S. retail market for digital downloaded songs and albums grew to $503.6 million in 2005 from $183.4 million in 2004. The RIAA estimated that U.S. consumers spent another $421.6 million on ring tones and other mobile music content last year and some $149.2 million on music subscription services.

(The organization did not have estimates for prior-year ring tone or subscription sales, meaning that according to the RIAA's data, they effectively grew from a base of $0).