Looking to boost its presence in the digital music market, America Online has acquired music subscription provider MusicNow from Circuit City, AOL announced Thursday.
The acquisition agreement was signed at the end of September, and the deal, whose financial terms weren't disclosed, closed this week, AOL said in a statement.
The new music service can now be previewed by the general public and has been renamed AOL Music Now.
AOL will gradually migrate subscribers of its existing music service, MusicNet@AOL, over to AOL Music Now in the coming months. They will be notified via e-mail of the switch, and they will maintain their current price plans.
Spreading Its Song
AOL is switching strategies by moving from a partnership arrangement that it has had with MusicNet to owning its own service.
"Since music is increasingly important as a strategic part of AOL's digital services offerings, it makes sense to own a music platform rather than to partner," says Nicholas Graham, an AOL spokesperson.
MusicNet@AOL is available only as an extra paid service to subscribers of AOL's online service, while AOL Music Now will be available to anybody, Graham says.
"This allows us to extend our music offerings to an entirely new expanded audience," Graham says. AOL Music Now will be integrated into the AOL.com portal and the AOL Music Web site.
AOL Music Now will be both an online music store and a subscription service. It will sell individual songs for 99 cents and offer two subscription options: unlimited streaming and downloading to a PC for $10 per month and unlimited streaming and downloading to a PC and a portable music device for $15 per month.
Songs from AOL Music Now can be managed with Windows Media Player or other compatible players. MusicNow's library includes more than 1 million songs from the four major music labels.
AOL Music Now will not require a separate software download because its functions can be accessed via a browser, Graham says.
"Streams can be played directly through the browser and downloads can be played offline on media players that support the Windows Media DRM [Digital Rights Management] 10, like Microsoft's Windows Media Player and AOL's Winamp, which will support it shortly," Graham says.
Subscriptions, Single Sales Offered
About 450,000 people now subscribe to MusicNet@AOL, and AOL hopes to build on top of that base, AOL's Graham says.
Graham says AOL wants to lead both segments of the market: the online-store "à la carte" model of selling individual songs and albums, and the subscription model, in which users typically pay a monthly fee for unlimited streaming of songs and controlled downloading of songs to a PC and/or mobile device.
This will be a difficult goal for AOL to attain, says Jupiter Research analyst Michael Gartenberg. "It's a tough business they're getting into right now," he says.
In à la carte downloads, the best known provider is Apple with its iTunes store, which works only with the company's ubiquitous iPod player. RealNetworks is probably the highest-profile hybrid provider of both downloads and subscriptions with its Rhapsody service.
Other players in the digital music market include Microsoft's MSN division and Napster. "It will be hard for AOL to differentiate itself in a meaningful way," Gartenberg says.
It's difficult to say at this stage whether AOL's decision to abandon its partnership strategy with MusicNet for an ownership strategy will pay off, Gartenberg says.
Whatever ends up happening, AOL made a move it had to make if it has aspirations to remain as a player in this market, says Ted Schadler, a Forrester Research analyst. In the early days of digital music, the business model for providers involved simply compiling a catalog of songs for people to buy, but that has changed as the market has evolved.
Acquiring customers has become a more complicated challenge, and requires differentiating one's service by providing elements such as personalization, customization, and community features, as well as flexibility in payment options, which ultimately translate into a better overall music experience, he says.
"To do that, you have to own the property. You can't do it through a loose affiliation or by rebranding someone else's offering," Schadler says. "So it makes a lot of sense that AOL would want to own those assets."
Development Plans
MusicNow holds its own against the competing services currently, but AOL must build on what's there in order to make it compelling and unique, Schadler says.
"It allows me to pick songs and express preferences and see playlists of people like me. It's pretty good," he says. "If it's about other people finding me based on my profile and contacting me over this Web site saying, 'Dude, you've got to check this out,' that's not happening."
AOL also plans to give users more customization and personalization options than are currently possible with MusicNet@AOL. Those features will include daily custom playlists and the capability to view and share music profiles with other users.
MusicNow, founded as FullAudio in 1999 and based in Chicago, was bought by Circuit City in 2004 and has 40 employees. AOL Music Now will operate as a stand-alone subsidiary within AOL, which in turn is a subsidiary of Time Warner.
U.S. digital music sales, which include downloads and subscriptions, tripled to more than $330 million in 2004, according to Jupiter Research. In 2005, download spending is expected to more than triple and reach $550 million, while subscription spending will grow more than 65 percent and exceed $250 million, says Jupiter Research.
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