AOL buys MusicNow, aims for top spot

Looking to boost its presence in the digital music market, America Online Inc. (AOL) has acquired music subscription provider MusicNow from Circuit City Stores Inc., 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 a statement.

The new music service, dubbed AOL Music Now, can be previewed as of Thursday by the general public at this Web site .

AOL will gradually migrate subscribers of its existing music service, MusicNet@AOL, over to AOL Music Now over the coming months. They will be notified via e-mail of the switch and they will maintain their current price plans.

AOL is switching strategies by moving from a partnership arrangement, which it’s 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,” said Nicholas Graham, an AOL spokesman.

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 said.

“This allows us to extend our music offerings to an entirely new expanded audience,” Graham said. AOL Music Now will be integrated into the portal and the AOL Music Web site.

There are currently about 450,000 subscribers of MusicNet@AOL, and AOL hopes to build on top of that base, he said.

AOL Music Now will offer users a higher degree of customization and personalization than are currently possible with MusicNet@AOL, AOL said.

Graham said AOL wants to lead both segments of the market: the online store “a 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, said Jupiter Research analyst Michael Gartenberg. “It’s a tough business they’re getting into right now,” he said.

In the segment of “a la carte” downloads, the best known provider is Apple Computer Inc. with its iTunes store, which works only with the company’s ubiquitous iPod player. RealNetworks Inc. is probably the highest profile “hybrid” provider of both downloads and subscriptions with its Rhapsody service.

Other players in the digital music space include Microsoft Corp.’s MSN division and Napster LLC. “It will be hard for AOL to differentiate itself in a meaningful way,” Gartenberg said.

It’s hard to say at this stage whether AOL’s decision to abandon its partnership strategy with MusicNet for an ownership strategy will pay off, Gartenberg said.

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 Inc.

AOL Music Now will be both an online music store and a subscription service. It will sell individual songs for US$0.99 and offer two subscription options: unlimited streaming and downloading to a PC for $9.95 per month and unlimited streaming and downloading to a PC and a portable music device for $14.95 per month.

AOL Music Now songs can be managed with Windows Media Player or other compatible players.

Personalization features will include daily custom playlists and the ability to view and share music profiles with other users.

MusicNow’s library includes over 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 said.

“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 said.

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 per cent and exceed $250 million, according to Jupiter Research.

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