Microsoft is expected to enter the online song store market this week, which should put the software giant head-to-head with Apple Computer in the music business at last.

The launch of Microsoft's iTunes rival will be timed along with the beta release of Microsoft's new Windows Media Player 10, expected on Thursday, sources say. The store will also be in beta mode, lacking some of the features that will be added later, sources said.

People familiar with the company's plans say the MSN Music song store will have Web-based components, but will also depend heavily on its role inside the Media Player software. (That spot will be shared with other services, such as Napster, that use the Windows Media format to distribute their songs.) The store will offer 99-cent downloads for now, leaving the monthly subscription model to its other partners. Ultimately, it will offer some additional features, such as the ability for customers to chat with each other.

"The simple fact is we believe in both advertising revenues and e-commerce revenues," Microsoft Chairman Bill Gates said in an interview with CNET News.com last week. "And so as you get people online comfortable with spending money...there will be companies that get to critical mass in terms of having those customer relationships and doing e-commerce."

But for all the recent attention paid to digital music services like Apple's iTunes, analysts say Microsoft's entry is as much about Windows as it is about selling music.

"This is strategic to Microsoft, as one piece of the overall Windows story," Jupiter Research analyst Michael Gartenberg said. "Microsoft needs to make sure that it can showcase all of its technology appropriately, reinforcing that vehicle as an up-to-date and extraordinarily competitive offering."

Indeed, Microsoft faces barriers in its music business that no rival shares. From antitrust worries to the need to keep its software customers happy, its business will be a continual balancing act. The decision to go ahead with the store anyway underscores just how important digital media has become to the company's future.

Microsoft's decision to launch its own music store reverses its earlier policy of avoiding direct competition with its own customers in the media business. In the first days after the launch of Apple's iTunes store, Microsoft executives dismissed the notion that the company needed its own store.

"We're still very comfortable with the strategy of enabling lots and lots of partners to build these things, rather than build a closed proprietary service on our own," David Caulton, a manager in Windows Media division, said in May 2003.

The software maker is also under close, ongoing scrutiny by antitrust regulators in the United States, Europe and Japan, which limits what it can do in the music business.

In the United States, the company has already been ordered to remove an obscure link, buried deep inside the Windows operating system, that opened an Internet Explorer browser loaded with a Microsoft-branded CD store. European regulators have been deeply critical of the company's use of the Media Player as leverage in the online media business and will likely similarly scrutinize any undue promotion of the MSN store.

Then there are competitors like RealNetworks, which is already suing Microsoft on antitrust grounds related to its bundling of the Media Player with Windows.

"I would assume that anyone that is competing with Microsoft would be looking at whether it is using its Windows monopoly to exclude the competitors in the music area," said Kevin O'Connell, an antitrust attorney with Manatt, Phelps & Phillips. "It would be the same thing as in the antitrust case when Microsoft was using the Windows monopoly to close down distribution channels for Netscape."

It's all about Windows
None of these hurdles is trivial, particularly in a business such as selling downloadable music, where actual margins remain only a few pennies per song sold. The real core of Microsoft's goal has little to do with e-commerce and everything to do with selling Windows, analysts said.

"The big business goal here is Microsoft wants to promote the Windows format to sell more PCs and to get people to upgrade," Directions of Microsoft analyst Matt Rosoff said. "Microsoft has taken a look at what its partners have been doing over past few years, and they figured to make Windows Media work they have to have (their own store)."

For the last several years, Microsoft has pursued an increasingly evangelical goal for its multimedia software, building relationships with big media companies such as Walt Disney and even America Online owner Time Warner, with the aim of persuading those partners to distribute content in the Windows Media format.

A second leg of that campaign is bearing fruit this year, as a wave of Windows-based entertainment hardware comes to market. Some of these will be portable devices, dubbed Portable Media Centers, running a slimmed-down version of Windows that includes Microsoft's new Janus copy-protection tools. This technology is expected to give a boost to subscription services by allowing the music to be put on portable devices for the first time.

Creative Labs is expected to release its Portable Media Center next week, while rival devices from iRiver and others are expected to debut a few months later. Many of those newer devices will support subscription services such as Napster, which will enable purchasers to fill entire hard drives with music for less than $20 a month.

But the company is also aiming to make the ordinary PC the hub of a home entertainment network, whether the system is running the Media Center Edition or the upcoming XP Reloaded version of Windows. In the ideal Microsoft vision, that Windows-based hub would store songs, videos, pictures and other media, and send them to televisions or stereos around a home, and serve as a storage locker for media that is transferred to portable devices to take into the outside world.

Apple has made all of this harder.

The iTunes store launched for the Macintosh computer in April 2003, revitalizing a moribund digital music business almost overnight. While initially dismissive, Gates conceded a few months later that it might be a good idea to have a Microsoft store, even if "it's not like you're going to make some (big) markup," he said.

But it quickly became clear that Apple, with its iTunes and its wildly popular iPod, was becoming synonymous in the public mind with digital music. By the time Apple launched its PC-based store in October 2003, Microsoft was already telling its dismayed music store partners that it too was going to get into the market after all.

The problem, from Microsoft's perspective, was that Apple was looking a little too much like Netscape for comfort. Netscape had originally been threatening to Microsoft because the upstart Web browser looked likely to become a rival platform. If developers wrote software for Netscape instead of Windows, people would interact with their computer through the browser instead of through the Windows operating system and much of Microsoft's power could be lost, the software company's executives feared.

iTunes and the iPod are less of a platform in that sense. But by the middle of last year, they began to look a lot like the core of the same home multimedia network that Microsoft wanted to build, and Microsoft started to respond more directly.

"Microsoft wants to make sure there's a Windows Media store around for a really long time, no matter what happens to the market," Rosoff said. "If Microsoft weren't in business, chances are no one else would survive."

But if much of the underlying focus is on supporting Microsoft's software, the forthcoming music store is also part of a broader campaign to transform the MSN portal into a hub for multimedia content. That effort has previously been bolstered by other high-profile deals, including Microsoft's securing of exclusive Major League Baseball content and the creation of a broad video service offering downloads of movies and TV shows.

"They're doing everything they can to extend and maintain the value of the MSN franchise," said GartnerG2 analyst Mike McGuire. "That's crucial, if they're looking at that kind of site and those kinds of portals as the future of media distribution."

A delicate dance with partners
The launch of the store is still viewed with some trepidation by Microsoft's online partners.

Napster CEO Chris Gorog said in a recent interview that he views the company's entry as roughly the same as that of Wal-Mart or Sony, neither of which undermined his company's 15 percent market share in the download market.

"We're no more concerned about the entry of MSN than we were about the entry of Wal-Mart or the entry of Sony," Gorog said. "We take all of these competitors very seriously, but we wouldn't rate the level of threat higher from the MSN service."

Digital media executives say that many, if not all of the major music services have been offered a home inside Microsoft's Media Player, although not all have yet taken the company's offer. But because MSN will now play a prominent role inside the player, that spot will be less valuable than it has been previously, some executives said.

Microsoft is planning a branding campaign around Windows Media that will help those other services, however. The company is helping to create a "Plays for sure" logo that will be used by device makers and online music services to assure consumers that purchases from participating companies will be compatible with each other, sources familiar with the plans say.

Analysts say much of Microsoft's own sales success depends on its hardware partners, however. The digital music space today is still largely driven by consumers with portable players such as the iPod, and Microsoft still lacks anything with that heft, they note.

"There is no Windows media device that is the equivalent of iPod, either in terms of technology or in role as cultural icon," Jupiter's Gartenberg said. "Without an iPod-like device there, in the short term (Microsoft's store) might not be as significant as people think."

From News.com