Microsoft Finds Digital Music Too Catchy to Resist

A day after RealNetworks (RNWK) and three top music labels unveiled MusicNet, their vision for the post-Napster future of digital music, Microsoft (MSFT) launched the beta version of MSN Music, a free online streaming music service.

Microsoft's service offers half of what RealNetworks' MusicNet promises -- streaming music of all genres to your PC -- but no downloads. Microsoft says it may add subscription-based, downloadable music services to the site at some point in the future.

That makes MSN Music a competitor, although a stunted one, for the massive online music market, which is expected to pull in $2.2 billion by 2003, according to Forrester Research. And it positions Microsoft's Windows Media against its perennial rival RealPlayer.

"They are going after the same coveted demographic of young music listeners [as MusicNet and Napster]," said Alan Alper, an analyst at Gomez Advisors Internet research firm.

Microsoft could use a chunk of that revenue, as PC demand and IT spending continue to slow. MSN Music, benefiting from the 59 million monthly visitors that Media Metrix says the MSN network draws each month, should at least give Microsoft a toehold in the young lucrative industry. But for now, the new service will bring only meager ad revenue to the company's coffers.

"This could keep people on MSN longer, which could be leveraged to make money, but at the end of the day Microsoft is still a PC software company," said ING Barings analyst George Godfrey, who rates the stock a buy. (His firm hasn't done underwriting for the company.)

"Microsoft needs a real growth driver unless it wants 8% growth for five years instead of [for the projected] two [years]," added Godfrey. Microsoft enjoyed revenue growth of nearly 30% until the past two years.

The new service functions much like a radio station. Users choose from titles on a list of 100 music types, from all five top record labels. (MusicNet promises tunes from only its three partners.) Using technology from the recently purchased Mongo Music company, the site also provides listeners with music titles similar to their previous choices. Other funky features include a "mood button" that connects users to music to match their emotional state.

A personalized playlist, which saves individuals' title choices, would be a boon to the service. MSN product manager Sarah Lefko says that feature is "absolutely coming in the future."

In order to listen to MSN Music, a user needs to download Microsoft's free Windows Media Player software. That gives Microsoft a small boost as its product competes with RealNetworks' RealPlayer to become the industry standard. The MusicNet platform will run on top of the Real Server products and RealPlayer digital media player.

"Real and Microsoft are engaged in a holy war to see who becomes the VHS of software media players and who becomes the Betamax," said Raymond James analyst Phil Leigh in a recent report.

In that jihad, don't be surprised if you see some more heavyweight partnerships. MusicNet's deal is not exclusive, and the two other major music labels, Sony (SNE) and Vivendi Universal (V), will need software for their own subscription music service called Duet, which is scheduled to launch later this year.

And, for all the intense rivalry in this industry, Microsoft's announcement shows it has one clear advantage: "Unlike RealNetworks, Microsoft actually has something to offer right now," said Alper.

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