(Reuters) (11/18/03)

By Paul Bond

Edited By Michael Bennett

REDMOND, WA - Microsoft Corp. confirmed Monday that it will enter the suddenly crowded online music business, a sector whose recent entrants include retailers Wal-Mart and Best Buy, along with the nascent business' leader, Apple Computer's iTunes.

Ironically, the world's biggest software company is entering the business of selling songs online to U.S. consumers just as Vivendi Universal, parent of the world's largest music company, sheds its MP3.com online music unit by selling it to CNet.

Microsoft declined to divulge any details of its service, except that it is expected to launch next year.

But for those searching for clues as to what it might look like, they should look toward UK MSN, which operates the MSN Music Club, whereby users purchase credits that they may spend on songs that can be burned onto CDs or, for fewer credits, songs that must reside on the users' computers.

Apple boasts that it has sold 17 million songs for 99 cents each since launching its iTunes online store in April, though CEO Steve Jobs has lamented the fact that iTunes isn't expected to turn a profit anytime soon.

In fact, Jobs has said the service is a loss leader designed to sell iPods, the portable digital music player from Apple.

Several published estimates indicate that rights holders get as much as 75 cents for each song sold digitally, which doesn't leave much left over for Apple and its many competitors, including Musicmatch, MusicNow and Roxio's new incarnation of the infamous Napster.

Musicmatch, MusicNow and Roxio all use Microsoft's Windows Media and digital rights management technology.

"It's a natural area for Microsoft to get into, being it's already in the media player business," Pacific Crest Securities analyst Brendan Barnicle said.

From Microsoft's viewpoint, if consumers are going to its Web site to get the player, why send them elsewhere to get the music, Barnicle theorized.

Although any revenue derived by Microsoft from a music download service would be a drop in its $35 billion bucket, it's a formidable announcement still, Barnicle said.

"It's a big potential competitive threat to Roxio, RealNetworks, Apple and others, where it's a more significant stream of revenue," he added.

Microsoft is talking to all of the major music labels, an insider said, and has already struck deals with many of them, though the company has no intention of discussing such progress until next year.

News of Microsoft's plans stemmed from a job posting whereby the company advertised that it is seeking a "senior-level marketing candidate."

The candidate "will be responsible for the product management, marketing plan development, launch and senior management resource allocation recommendation for the new Microsoft Music Download Service," the listing said.

Forrester Research has estimated that sales of digital music online will reach $1.4 billion over the next three years, accounting for about 11% of the music industry's sales.

"We are excited to confirm that MSN will deliver a download music service next year, and we look forward to sharing more details at a later time," said Lisa Gurry, Microsoft's group product manager at MSN.

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