Best Buy to take on iTunes

[nextgenxbox]

http://www.mercurynews.com/mld/mercu...y/15695911.htm

Hungry for a taste of Apple's overflowing music pie, Best Buy Co. Inc. is entering the music downloading business. But analysts don't expect the Richfield-based retailer to get a very big slice.

The Best Buy Digital Music Store, to launch this month, will charge 99 cents to buy a song, or $14.99 a month for subscriptions that will allow customers to listen to -- but not own -- an unlimited number of tunes. It also will sell a companion digital player, the SanDisk Sansa e200R, costing from $140 to $250 for 2 to 8 gigabytes of memory capacity.

The decision reflects the growing popularity of downloading music to portable music players such as Apple's iPod. A fall survey of nearly 1,000 high school students by Minneapolis brokerage firm Piper Jaffray & Co. showed that 72 percent owned a digital music player and 79 percent downloaded music, some from legal online stores and some from illegal music-sharing services. Best Buy already sells about 28 percent of the digital music players bought in the United States.

Best Buy said its market opportunity lies not in the online music store itself, which is merely a rebranded version of the existing RealNetwork's Rhapsody website, but in the way the portable music player tightly connects to the service. That will make it easy to buy or rent songs online, said Jennifer Schaidler, Best Buy's vice president for music.

But analysts say Best Buy faces an uphill climb against the popularity of the iPod, which Piper Jaffray says holds 78 percent of the U.S. digital music player market, and Apple's iTunes online music store, which sells 70 percent of the online music in the U.S.

``Ultimately it will fall well short of Apple's iTunes and the upcoming Microsoft online music store for its new Zune digital music player,'' said Gene Munster, a Piper Jaffray analyst in Minneapolis. One problem for Best Buy is that, besides music, iTunes offers downloads of TV shows, movies, album artwork and voice recordings called podcasts, while Rhapsody offers only music and related music videos, Munster said.

``Best Buy deserves credit for making two good decisions,'' said Phil Leigh, an analyst with Inside Digital Media in Tampa, Fla. ``They are taking advantage of their brand on the Internet, and they are making the best possible choice of partners that they could. But will it knock iTunes out of its leadership position? Not a saint's chance at a political convention, and that's about as slim a chance as there is.''

Best Buy said the decision to launch on online music store doesn't mean it fears that sales of music CDs are dropping, though Schaidler declined to reveal CD revenue.

However, Piper Jaffray analyst Mitch Kaiser said Best Buy's music CD sales, which contribute about 5 percent of total revenue, are down about 10 percent from last year.

Other analysts said CD sales will inevitably give way to online music downloads.

Munster expects about 6 percent of all music to be downloaded this year, up from 2 percent in 2005. ``Downloads won't equal store sales for another 10 years,'' he said, ``but online is definitely in hyper-growth mode.''

Best Buy's online store will offer the same features as the Rhapsody service, a library of 2.5 million songs, compared with 3.5 million for iTunes. But unlike iTunes, which sells songs, Rhapsody sells and rents music. Customers can buy songs outright, meaning they can download the songs and burn them to a CD, or rent music, meaning they have listen-only access to songs for as long as they continue to pay the monthly subscription fee.

Subscription services have not been as successful as the buy-and-download approach because of technical problems with transferring rented songs to a portable music player, Leigh said.

Best Buy hopes to change that. Music subscribers can easily update the song lists when the player is connected to the Digital Music Store, Schaidler said. Customers also can buy a rented song by pressing a single button on the portable player, she said. In addition, Best Buy will sell the players with a two-month free subscription that includes about 30 hours of preloaded rented music -- songs that won't play if the subscription lapses.

Best Buy has dipped its toes in online music before. In 2003, it sold Rhapsody prepaid cards, and about two years ago did the same thing for the Napster online music store. The latest venture is Best Buy's first offer of an online music store bearing its own name. The current arrangement with Rhapsody is more expensive than the one three years ago, but Schaidler said the earlier Rhapsody service did not offer the ability to download songs to portable digital music players.

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Rhapsody? Real? Yuck.