Published: October 20, 2004 in Knowledge@Wharton Last week the opening shots were fired in the long-anticipated battle between Microsoft and Apple to gain command of the online music business. Microsoft unveiled its new beta Windows Media Player and announced the launch of a so-called built-in Digital Media Mall that offers access to online music stores such as Napster, Musicmatch, MusicNow and Wal-Mart Music Downloads. Microsoft's MSN Music service offers 500,000 songs at 99 cents each and is compatible with more than 70 music players. As such, it directly challenges Apple Computer, whose iTunes music service dominates the online music industry with a 70% market share, though songs from iTunes Music store can be played only on Apple's iPod music players (unless they are converted to formats compatible with other players).

The stakes in this battle are high. Research firm JupiterResearch estimates that digital music sales are expected to double to $270 million in 2004 compared to 2003. By 2009, though, Jupiter projects that digital music sales will increase to $1.7 billion, totaling 12% of consumer music spending. Whether Apple will retain its lead of this fast-growing market or be dislodged by Microsoft - or whether the online music market will be fragmented among a number of providers - will be determined by the course of this conflict over the coming years.

So which company is likely to prevail? For now, Apple, which has sold 125 million songs since it launched the Windows version of iTunes in 2003, has a huge lead over Microsoft. Moreover, Microsoft's offering is just half that of iTunes, which provides one million songs to its customers. Little wonder that Apple hasn't done much so far to respond to Microsoft's foray, though it did announce the launch of an affiliate program for iTunes on the same day that Microsoft launched its music service. Some analysts are upbeat about Apple's prospects. "The more the digital music landscape changes, the more it stays the same," notes Steve Lidberg, an analyst at Pacific Crest, a brokerage firm.
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