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A Free Ride

By giving customers a broadband pipe, cable system operators and Internet-protocol TV operators are providing customers with a way to get music from rival services such as Apple Computer Inc.’s iTunes Music Store and legal peer-to-peer sites.

Aside from monthly broadband service subscriptions, multichannel players rarely get more than an occasional royalty from the music services running over their data and video networks.

And there’s reason to believe that an overwhelming share of music revenue will continue to go to players other than cable and satellite operators because MSOs don’t capture a royalty on the vast majority of music sales enabled by their broadband networks.

In February 2006, iTunes service downloaded its billionth song. Cable had about 60% of the U.S. broadband market at the end of third quarter 2005, according to Parks Associates. So at 99 cents per song, operators have given Apple a free ride to the tune of about $594 million.

To some analysts, cable isn’t having the music market taken from them — they’re effectively giving it away. “Cable operators tend to view music as a filler and not so much as a business model or revenue-generating opportunity,” said Mike Paxton, senior analyst, converging markets and technologies, at In-Stat, a sister company to Multichannel News.

BUNDLING FOR BUSINESS

Although the digital music market is big and growing, operators’ ability to make a profit on song downloads looks bleak. The 99-cent pie simply gets sliced too thin. Some analysts say that cable operators typically bundle music with other services in order to make a business case for offering songs.

“They’re looking at more lucrative, high-margin game or video services to make up for the loss on the music side,” said Harry Wang, a research analyst at Parks Associates.

One glimmer of opportunity is that Apple’s dominance of online music may be waning, according to a January 2006 report by Strategy Analytics. Although iTunes is synonymous with the iPod, the research firm argues that the player has shortcomings — ones that rival services are starting to capitalize on.

“As a strategy to bring it into mobile, Apple’s partnership with Motorola [Corp.] has failed,” senior analyst Martin Olausson wrote in a January 2006 report. “Its lack of a subscription payment model, as well as the fact that it is currently limited to iPod players, will increasingly put Apple at a disadvantage to services such as [Verizon Wireless’] V Cast Music. The speed with which sales of music-player-enabled mobile phones will overtake dedicated music players will accelerate this trend.”

WINDOW OF OPPORTUNITY

That creates a window of opportunity — one that will remain open for 24 to 36 months, based on Strategy Analytics’ estimate of how long it will take Apple to offer its own wireless phone.

As far as revenue goes, music isn’t a significant new stream, at least in its current form. “It’s a relatively small portion,” said Himesh Bhise, corporate vice president of high-speed Internet product management at Charter. “It’s more about building value for the high-speed connection.”

If music can’t be turned into a significant revenue stream, can it at least serve as a way for IPTV players, such as BellSouth and Verizon Communications Inc., to differentiate their bundles from those of cable and satellite? Some analysts think not. “I don’t see music as a significant differentiator for IPTV providers,” said Wang.

No service provider can compete on price alone, so it’s important to develop features and services that can be used to justify a premium. Music seems like an obvious choice, but maximizing its value means offering it on multiple platforms instead of just TVs and PCs. Otherwise, cable’s and IPTV’s music offerings are likely to wind up stranded, just like iTunes.

RIGHTS ISSUES

Allowing music to be ported across multiple devices and media means addressing digital-rights management — something that takes time, which multichannel operators don’t have a lot of as rival music services continue to build their own followings.

“This is a complicated issue because you want to take the music from cable services and put it into devices or CDs,” said Wang, who sees DRM as a key hurdle for cable’s music aspirations. “There are a lot of rights issues that have to be discussed with the record companies. The negotiations are very complicated.”