Apple Computer's ( AAPL) iTunes may dominate the legitimate market for digital music, but that doesn't mean the company's competitors are sitting still. On Tuesday, Time Warner's ( TWX) AOL division relaunched its Music Now download service, adding streaming Internet radio and thousands of music videos. Separately, start-up company SpiralFrog announced a new advertising-supported music download service that will feature music from Vivendi Universal's Universal Music Group. Both companies made an effort to differentiate their services from the competition. Music Now users who sign up for the site's subscription service will be able to download and play as many of the music videos available on the site as they'd like, something they couldn't do elsewhere, AOL said. iTunes, for instance, offers music videos only on a pay-per-download basis. Likewise, SpiralFrog is attempting to create a new type of download service. Instead of the iTunes a la carte model or the subscription services offered by other download sites, SpiralFrog plans to rely on advertising for its revenue. In other words, SpiralFrog users will be able to download songs for free, in exchange for watching or listening to advertisements on the SpiralFrog Web site. Interestingly, SpiralFrog's service seems to be pitched to users of illegal file-swapping sites as much or more than it is to iTunes users. In a statement, the company emphasized that its service will be free and legal and devoid of the spyware and viruses that have infested file-swapping sites.
"SpiralFrog will offer consumers a better experience and environment than they can get from any pirate site," said SpiralFrog CEO Robin Kent in a statement. Still, the benchmark for success in the world of legal download music is iTunes, and it remains to be seen whether either Music Now or SpiralFrog will get much traction against it. Thus far, Music Now, which AOL bought from Circuit City ( CC) last November, has had limited success. One thing that could hurt both services is their choice of encoding technology. Music Now relies on Microsoft's ( MSFT) Windows Media software. Although SpiralFrog has not given out many details about its service, a source close to the company's deal with Universal said that SpiralFrog also will likely rely on Windows Media. The problem for both companies is that Microsoft is coming out with its own music service and portable player -- dubbed Zune -- later this year. Zune will be incompatible with the Windows Media players and download services. While Microsoft has said that it will support both the Zune and Windows Media formats, some observers have questioned its commitment to the latter, given the Zune effort. Perhaps more critically, it's likely that neither Music Now nor SpiralFrog will be compatible with Apple's iPod digital music players. iPods account for more than 75% of the digital music players sold in the U.S., meaning that any service incompatible with them will have a very limited market.
But it's also unclear how much of an appetite consumers will have for subscription or related services. Although analysts have long touted subscription services, they've largely struggled against iTunes, not to mention the illicit file sites. In 2005, for instance, sales of digital songs and albums totaled $499 million, according to the Recording Industry Association of America. In contrast, the sales tallied by all the subscription services amounted to just $149.2 million, or less than a third of the download market. In recent trading, shares of Apple were off $1.55, or 2.3%, to $65.43, while shares of Time Warner were up 20 cents, or 1.2%, to $16.64.