eMusic’s positioning: It’s just iTunes and us

Yesterday I happened to read a blog post from Paul Kedrovsky containing some sage advice for companies competing in new markets: declare victory early and often. To quote him:

… many markets are tippy — they want there to be a market leader — so you can self-servingly help things along by declaring your firm to be the chosen one.

It strikes me that that is what eMusic has been trying to do, and with some success. Of course eMusic can’t declare itself to be the overall market leader in digital music–that title being reserved for Apple–but what eMusic has done is to unilaterally declare itself to be the world’s largest digital retailer of independent music and (more important) number two behind Apple in the overall digital music market, outpacing Napster, Rhapsody, and the rest. Some interesting points about this strategy:

First, while it’s repeated uncritically by many people (including me, I’m sorry to say), eMusic’s claim to be number two is somewhat qualified. In conjunction with a press release on April 12, 2006, eMusic first claimed that

eMusic (http://www.emusic.com) is the world’s leading digital retailer of independent music, and the #2 digital music service overall, second only to iTunes in number of downloads sold.

Beginning with the next press release on April 24 this was shortened to the following statement, used in all subsequent press releases:

eMusic (http://www.emusic.com) is the world’s leading digital retailer of independent music, second only to iTunes in number of downloads sold.

Note carefully that eMusic is not currently claiming to be the #2 digital music service overall, instead they are simply claiming to have sold more music downloads than any other service except for the iTunes Store. This claim appears to be based on a market share study done by the NPD Group showing eMusic to be #2 in market share behind Apple. This study has been widely reported in the press (most notably in a USA Today story on eMusic), but details about it are hard to come by; in particular it’s not clear exactly what was measured in the study and, assuming that the study measured paid downloads, how that term was defined.

Based on other factors I’m guessing that downloads in this context refers to downloaded tracks that can be burned to CDs, and excludes so-called tethered downloads that are restricted by DRM schemes to be playable on a PC or digital music device only while a subscription is active. If so, this goes a long way to explain the results of the study, as both the iTunes Store and eMusic sell only burnable downloads, while other services like Napster and Rhapsody deal primarily in tethered downloads, with burnable downloads being an optional purchase.

Note that eMusic is not in the #2 position based on either number of subscribers or total revenue. The most recent figures I can find (quoted in a Financial Times article, among others) have eMusic at 200,000 subscribers, which would put eMusic’s yearly revenue at $25-50M, depending on the mix of subscribers on the different price plans. By contrast, as noted at Digital Audio Insider, Napster has over 600,000 subscribers and almost $100M a year in revenue. (Actually these numbers are outdated; Napster’s most recent SEC filing shows it with a revenue run rate of over $110M per year.) However most of Napster’s revenue is presumably from its Napster and Napster To Go subscription service for tethered downloads, as opposed to sales of burnable downloads.

Second, eMusic masterfully used the hype around the recent Apple announcements to advance its strategy of being Avis to Apple’s Hertz. Although eMusic launched its European service over a month ago, it waited to formally announce it until just before Apple Showtime event, at a time when the press was in a frenzy about Apple, iPods, iTunes, and digital music in general, but didn’t yet have any actual Apple-related news to report. eMusic managed to get substantial press coverage for its launch, with most stories picking up on the theme that eMusic’s offerings are compatible with iPods, and thus eMusic was a viable alternative–really the only viable alternative–to the iTunes Store for iPod users wanting a choice of digital music services. And since (as we all know) the iPod is the only digital music device worth mentioning, that means (according to the eMusic script) that eMusic is the only alternative to the iTunes Store, period.

As David Pakman was quoted as saying (in an MP3.com article), The monopoly of iTunes in Europe is over. As he didn’t say (but may have wanted to), Napster and Rhapsody are history. Zune won’t be a factor. From here on out it’s just Apple and eMusic.

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