• by Ross Fadner , August 22, 2004

The vast majority of consumers are unaware that an Apple iPod digital music player will not play music files from other digital music providers, while a smaller majority agree that it is within RealNetworks' rights to develop a program that will make its music files compatible with the iPod. Those are among the findings of a new study on consumer perceptions about music download services scheduled to be released today by InsightExpress.

According to the survey results, only eight percent of respondents were aware that files from other digital music stores were not compatible with Apple's iPod. However, once they were alerted that several weeks ago, RealNetworks announced that it had figured out a way to re-create Apple's proprietary technology, enabling it to sell iPod-compatible songs without Apple's permission, a 46 percent majority agreed that RealNetworks should have the right to do so. When asked if Apple should have the right to a proprietary format, 28 percent agreed, while 52 percent were either neutral or unsure.

GartnerG2 Senior Analyst Michael McGuire noted that despite the indicated lack of awareness, the consumer ultimately decides whether Apple's proprietary format is a problem or not. "The market rules and consumers are the market. Right now," he said, "many consumers either aren't aware, or aren't worried by the possibility that they are 'locked in' by Apple's iTunes/iPod combination." He added that there will be little or no incentive for consumers to cross over unless Real can show consumers that it has unique or compelling content.

While it remains unclear from RealNetworks' latest marketing push what distinguishes Real's store from iTunes in terms of content, its recent price cut is certainly a viable consideration point for consumers. For a limited time, Real is selling songs at 49 cents a download--half the price of iTunes. A nationwide print, radio, and Web marketing campaign will promote the offer, along with a "freedom of choice" Web site for online music consumers. The campaign marks the second wave of publicity around the enabling technology, which it calls "Harmony."

McGuire argues that Apple is responsible for the general public's awareness of pay-for online music stores. "I would say that to the extent consumers have any awareness of the legitimate online music stores is because of Apple's iPod advertising campaign. Period," he said, adding that "neither [RealNetworks'] Rhapsody nor the 'legal' Napster ever mounted anything approaching the reach and creativity of the iPod/iTunes advertising." He adds that marketing was the crucial difference-maker. "Were competing products marketed in as compelling a fashion? Apparently not," he said. "If they were, the online market might look a lot different now."

Doug Adams, InsightExpress marketing director, believes that RealNetworks' new campaign could present problems for Apple. According to Adams, "[Apple] is going to have to answer some tough questions from its consumers"--especially, he said, as they become more aware that Apple isn't simply trying to sell hardware, but a whole proprietary music package reminiscent of its PC business. "Consumers are always going to want choice," Adams said, adding that "getting involved in a proprietary platform war" could backfire, as it did in the PC market, which is dominated by Microsoft. He also noted that right now Apple dominates a very small market, but one with huge growth potential.

But potential, of course, is no guarantee. Overall industry growth could be stymied by a recent federal appeals court ruling in favor of peer-to-peer (P2P) file sharing service Grokster over film studio Metro-Goldwyn-Mayer, which was suing the file-sharing service for copyright infringement. The decision has the effect of holding P2P services not-liable for the content that is distributed over them. The ruling could subsequently spark renewed interest in illegal file-sharing, which is still rampant on the Internet, or a new crop of similar services.

According to GartnerG2's McGuire, "the real test for Apple and everybody else in the online music world will be when Microsoft unleashes its online store--and when portability comes to subscription services such as Rhapsody and Napster's premium services." In this case, he said it might be difficult to successfully run a proprietary format, "as the market choices expand, and consumers become more aware of them."