Could Cell Phones Topple iPods?

There's no shortage of challengers to iTunes' hegemony: In September, MySpace opened its new music storefront, and Best Buy purchased Napster to dip into online music retailing; in August, Rhapsody formed a partnership with MTV/Viacom to help market its subscription and download service; two years ago, Microsoft launched its Zune player and its streaming and retail alternatives, Zune Pass and Zune Marketplace; and, most recently, in a shot across the bows of its subscription-supported rivals, Zune Pass announced last month that all users would be entitled to 10 free monthly downloads.

Yet all these companies are still just scrambling after iTunes' crumbs—this past summer, iTunes passed 5 billion downloads and overtook Walmart as the world's largest music retailer. No surprise there: The ubiquity of the iPod has given iTunes such an advantage that even the entrée of online retailer Amazon last year and the Zune player two years ago have done little to dent its dominance.

With only incremental progress into iTunes' market share expected in the short term, many industry watchers think the emergence of an entirely new platform could open up the download market long before Amazon or Microsoft catches up.

Cellphones are expected to be the game-changing product with the power to rewrite the landscape.

"The iPod was an example of a groundbreaking product that caught everyone's imagination; the iPhone is the second wave of that," says Neil Smith, Rhapsody's vice president of business management. He points to the already well-capitalized phone companies and carriers as a prime source of continuing innovation. (Rhapsody allied with Verizon last year.) "Despite the downturn in the economy, [cellphone makers and carriers] have robust businesses and are the delivery mechanism for a lot of this stuff."

Mobile phones are a radio-killing app, making the Web's entire panoply of music fully portable. While music players are great repositories for music you already own, they aren't gateways to what you might want to discover. To learn about new artists, many now look to online entities where they once spun the radio dial.

With personalized streams, shared playlists and huge catalogs of music within arm's reach, the mobile phone's access to social networking sites, Internet radio and subscription services threatens to revolutionize the idea of "broadcasting." Using cellphones as their portals, online music companies can specifically target the techno-savvy, tastemaking under-35 demographic that radio has left behind and offer programs tailored to personal tastes.

Phil Leigh, president of market research group Inside Digital Media, says record labels need to figure out a way to use the Internet to reach consumers, much as they once relied on radio: "The digital download industry is going to be only one component," he says, "and this second component could be equal in size in five to seven years."

The ability of music streaming sites such as Pandora, or Rhapsody to make suggestions based on users' listening history opens an entirely new avenue of artist exposure. Liberated from the home computer and available in cars via Bluetooth, streamed audio has the potential to boost artists' profiles in the way MTV or radio once did. And with the one-button retailing most music sites offer, there's no longer a separation between discovering and purchasing new songs.

But as the iPod (and, to a lesser extent, the PC) demonstrated, the platform is key in driving content.

Many believe that cellphones will soon eliminate the need for separate music players, citing the ease of syncing phones and computers and transferring tracks back and forth, along with phones' general functionality, ever-increasing storage capacity and overall sophistication. Already, the market penetration for mobile phones far outstrips that of music players. "You're still going to see millions of iPods sold," Resnikoff says. "It's a great item. It's not going to go away. But the move is toward the iPhone and more diversified devices, more complicated systems—that's where the battle really starts to heat up."

Of course, the iPhone is currently the best multifunctional phone available. But Apple's exclusivity in its partnerships with carriers—it deals with only one service provider per geographical region—locks out nearly three-quarters of the market, limiting it in a way the iPod never was. While there's been talk that Apple will eventually open things up, the question remains whether it will be able to demand the same perks it got from AT&T (a heavily subsidized phone and, before June, a portion of the data fees).

Meanwhile, there's an incentive for other carriers to field effective challengers, such as the BlackBerry Storm or T-Mobile's Google-designed G1.

Eventually, cellphones' ability to connect to the Internet could even render downloading obsolete. A new service offered by streams every song (in its catalog) on your computer, wherever you have Internet access—car, work, even on vacation. You can add new songs to your online collection for 10 cents apiece, with the option to download the tracks for an additional 79 cents each.

"We may be talking about systems that don't rely on discrete downloads to a particular PC or iPod," Resnikoff says. "It may all be in a cloud, your collection of several thousand songs that you access from wherever, and you won't really think about where it's stored."

In the short term, though, iTunes is still sitting pretty. And, just last week, the online music retail giant took another step toward maintaining its position at the top, announcing that 8 million songs in the store's catalog are now available for purchase without the Digital Rights Management restriction that prevented songs from being played in other platforms.

But the challenges to iTunes are mounting nonetheless. We've only just begun this new paradigm, and there's still time for the playing field to shift.

Remember: AOL was a dominant technology company at one point. Similarly, iTunes is little more than a portal to content available elsewhere.

"The question," as Smith puts it, "is whether there's such a thing as broadband in the iPod world."

For the time being, hold the phone.

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Chris Parker
Contact: Chris Parker

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