Online Music & Web 3.0 (Part 3)

Business Model

Music sites primarily earn revenues from subscriptions, music downloads, advertisements and the different products sold through its sites. Most music sites are allowing downloads at approximately 99 cents per song and analysts say it is not enough to cover the costs. Currently most of the music sites are losing money. Napster (NAPS) and Real Networks (RNWK) are burning significant amount of cash every quarter and need to rethink their business model. Subscription rates vary from $8.99 per month for Yahoo! Music Unlimited to $9.95 per month for Napster to $12.99 per month for Rhapsody Unlimited.

The success of Apple’s iTunes Music Store is coupled with the iPod, and without the iPod, the profitability of Apple’s Music Business would not be anywhere nearly as exciting. Furthermore, today, iTunes also sells videos. MySpace had started off with a focus on music but after the acquisition of the site by News Corp. it has broadened its scope to include videos, photos, etc.

From January 1, 2007 to July 1, 2007 digital track sales increased by 49%, to 417.3 million compared to 229.8 million in the same period a year ago. US total online music revenues are expected to grow by 50% from $1.1 billion in 2006 to $1.7 billion in 2007.

Yahoo! Music is reported to be profitable. It is profitable because it is able to spread the marketing costs across a large user base and is cross selling other products and services. Independent music sites have a much bigger challenge, as do the Record Labels like Warner Music Group (WMG).

All in all, Online Music, while a humongous and fast growing market, it seems to also be a struggling one from a business model sustainability point of view, with none other than Apple’s iTunes-iPod franchise having a robust, long term promise.

There is, however, a change in the horizon, as Music Phones sweep across the world. Perhaps, this will cause some handset vendors to attempt an iPhone-iTunes like closed-end model by acquiring some of the independent music sites.

(To be Continued)

[Part 1]
[Part 2]

This segment is part 3 in the series : Online Music & Web 3.0
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