With unequaled software reach, Microsoft's entry into the market will almost necessarily create a splash larger than that of virtually any other company, despite being as much as a year behind Apple and others. But the company's service is also certain to be closely scrutinized by antitrust regulators who are already examining its music policies with a microscope.
What's new:
Microsoft will launch its own music-download store next year, putting it on the path to direct competition with a growing list of other providers.
Bottom line:
Despite being late to the game, the software giant’s entry will likely create significant turmoil and is certain to be closely scrutinized by antitrust regulators who are already examining its music policies.
The plans also represent a change in direction that has left some of Microsoft's own customers feeling betrayed. When Apple's store launched last year, Microsoft publicly stated it had no plans to compete directly, preferring instead to let other stores use Microsoft technology for their own efforts.
But those assurances changed over the course of the last few months, rivals said.
"They called up and said they were going to do it themselves, but the person on the phone said, 'You know us, it's going to take us more than a year to get it up,'" said one executive at a rival music service, asking not to be named. "It was a bad news, good news kind of thing."
The official confirmation of Microsoft's music-retail plans come after months of speculation and hints from as high as Microsoft Chairman Bill Gates himself. Gates said in July that he was considering building a song store, even if he didn't see it as a direct profit center for the company.
A spokeswoman for the company's MSN division said that the store is expected to launch in 2004, but gave no details beyond that. As first reported by The Wall Street Journal, the company also posted a listing on its corporate hiring site last week advertising for a senior marketing staffer who could help develop a business plan for the site's launch.
By the time Microsoft's download store debuts, the digital landscape will be awash in competition, however. Apple's Windows-based store, which sold 1.5 million songs in the first week of November, opened in mid-October. The new Napster--a combination store and subscription service--launched at the end of October.
RealNetworks' Rhapsody subscription service is adding a song store that will be open to the public by the end of the year. Musicmatch, MusicNow and BuyMusic all have opened their digital doors already. Major retailers including Wal-Mart Stores and Amazon.com are expected to launch their own efforts, while PC makers including Dell are offering co-branded versions of other company's stores.
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As recently as last summer, Microsoft appeared to be keeping its hat out of the direct retail ring, under the theory that persuading as many other companies as possible to use its Windows Media technology was more important than having its own store.
"We're still very comfortable with the strategy of enabling lots and lots of partners to build these things, rather than build a closed proprietary service on our own," David Caulton, a group manager for the Windows division, said at the time.
It's too early to tell whether the software company's shift has ruffled enough feathers to drive other media companies or distributors to rival formats, such as those distributed by Apple or Sony. Some of Microsoft's soon-to-be-rivals say that they had expected the company's entry anyway and that working with Microsoft inevitably had elements of competition and cooperation.
"We have known for some time that they were considering this, specifically the MSN group," said Greg Rudin, vice president of marketing for FullAudio's MusicNow service, which is carried as a link inside Microsoft's Windows Media Player. "We are strongly partnered with the Windows Media division, and...they have given us assurances that they will be fair and equitable with their partners."
While Microsoft tries to soothe customers' bitterness over its store plans, it also will have to negotiate a tricky legal landscape. Regulators on both sides of the Atlantic are already asking hard questions about the software giant's music plans and will certainly watch closely to see how tightly the company links the store to its Windows operating system and the Windows Media application.
European antitrust officials are already considering forcing Microsoft to remove its multimedia software from the operating system, saying that the connection is unfair to rival software companies.
In the United States, federal and state regulators are questioning a "Shop for Music Online" link inside the XP operating system that leads directly to a Microsoft page.
The spokeswoman for Microsoft said it was too early to tell whether the download store will be contained inside the Windows Media application, or simply included inside the MSN service. Most analysts expect a link to the store inside the application itself, following in the wake of Apple's success with its iTunes software.
