Online Music Hitting False Notes

If so, the online world could end up looking a lot like the offline world, where music store companies have been closing and consolidating in recent years. In their place, most music CDs are now being sold through general or electronics retailers such as Best Buy (BBY Quote) or Wal-Mart (WMT Quote), companies that often use discounted CDs to lure in customers to buy other products.

MusicNow, the digital music service from Time Warner's (TWX Quote) AOL unit, is profitable, says Neil Smith. But that has a lot to do with being able to defray marketing costs across AOL's huge user base, he says. And selling subscriptions to MusicNow is just one piece of a larger strategy of marketing music and music-related content, he says.

At this point, the companies that make money on digital music "won't be the pure-play music companies," says Smith. "If history is any guide, the only people that make money [in music] are the [music] labels."