Subscription online music sites face uphill battle

LOS ANGELES -- Online subscription music sites have finally arrived. But there's been little fanfare, and so far almost no one is buying.

Free music-swapping services continue to attract millions of new users despite the recording industry's legal efforts to shutter them, and few consumers are even aware of the handful of pay sites that have emerged over the last year.

That's unlikely to change -- unless the new sites begin to offer compelling, innovative features that set them apart from the free networks, consumers and analysts say.

Sean Withrow, a music lover and Silicon Valley executive, said he would consider using a subscription service if it could improve his shopping experience and offer more than WinMX, the site on which he spends about two hours a week sampling and downloading music for free.

"I'm music-savvy, but stores can be overwhelming. You can get frustrated," said the 33-year-old Withrow. "It's really not about the money." None of the leading pay sites, which include Listen.com, pressplay, MusicNet and FullAudio, have done much to employ clever technologies to spice up the experience of discovering and purchasing music. Instead, they offer limited downloads that actually expire when a customer ends a subscription.

"Every day they are not offering widely compelling music across the board money is going out the window," said P.J. McNealy, research director at GartnerG2 in San Jose.

Analysts estimate that less than 100,000 people have bought pay subscriptions.

The major music labels themselves won't release the data, saying it's too early to start measuring success. They say they are still experimenting with their sites' look and feel, studying payment schemes and negotiating online royalty rates with hundreds of artists, labels and publishers.

The logistics of building pay sites are indeed enormous, especially compared with the simplicity of the free services that are the stepchildren of Napster and rely on so-called peer-to-peer networking that allows users to share with others the downloaded music on their hard drives.

"With every month that goes by, our services will improve, and simultaneously it's likely the (free) sites will degrade," said Alan McGlade, chief executive of MusicNet, a joint venture of the software firm RealNetworks and three of the five major recording companies: AOL Time Warner, Bertelsmann and EMI Group.

Both MusicNet and pressplay -- a joint venture of the other two major recording companies, Sony Music Entertainment and Universal Music Group -- say they are close to agreements that would give their customers access to most of the music from all five major recording companies. Currently, each firm has only signed deals with its parent company as well as with various independent labels.

MusicNet and pressplay officials said they will begin aggressively marketing their sites once they have more complete libraries. Pressplay, meanwhile, has won a place in Microsoft's test version of its latest Windows Media Player, which the software giant is launching on Wednesday.

But exhaustive offerings are just one ingredient of what many would consider a successful online music venture.

Withrow would like to see pay services with software that makes recommendations based on user taste.

Ideally, if he wanted some music for a group of friends coming over, he might type the words "dinner party" and "mellow" and the service would find him good selections.

"They should try to solve the frustrations a customer gets going into a store," he said.

"Consumer attitudes can't get much worse," said Michael Goodman, an analyst with the Yankee Group research firm in Boston.

Analysts say the subscription sites are going to have to outperform existing sites including KaZaa, Grokster and Morpheus. According to the market research firm Ipsos-Reid, some 40 million Americans, or 19 percent of the population aged 12 and over, use such services.

That's a tough proposition as long as pay sites continue to place restrictions on how much content consumers can access and where they can transfer it.

The entertainment industry is also winning few fans among consumers with its backing of federal legislation that would allow it to use invasive electronic techniques against file-swapping services and their users.

Chris Beatty, a 27-year-old music enthusiast in San Francisco, said he's downloaded about 100 CDs from the free sites and can't even name a single subscription site.

The $10 monthly fees that most subscription sites charge for basic access -- usually involving unlimited streaming and some restricted downloads -- is far above the $3 Beatty said he'd be willing to pay.

The whole appeal of getting music online is to get it more cheaply than it sells in a store, he said.

Beatty said he still buys CDs. In June, he bought a reggae CD. But he paid $5 for it at a second-hand retailer.

McNealy, the Gartner analyst, says people are willing to pay for convenience and the music industry should address what consumers really want.

"The demand is there. There's a huge chunk of people waiting for legitimate services," he said.

New York-based Jupiter Research forecasts that consumers will spend $27 million on digital subscription services like pressplay and MusicNet this year, just a sliver compared with the roughly $13.7 billion in sales the recording industry posted in 2001.

But by 2005, online subscribers will spend $495 million, rising to nearly $1.2 billion in 2007, Jupiter said.

"The bulk of consumers are not purposely stealing," said Stacey Herron, Jupiter's media and entertainment analyst.