Despite ferocious competition it's still possible to make money out of online-music services, a leading Internet analyst says.

Writing in BusinessWeek, Standard & Poor's Equity Research analyst Scott Kessler predicts that despite increasing competition companies will find ways of making money. "Just not in the ways you might expect," he suggests.

He said: "Of the types of businesses exploring online music services we believe the record companies could garner the most significant incremental benefit from increased revenues and lower costs associated with online-music services.

"Record companies will benefit from not having to pay for CD processing, packaging and shipping. They would also be able to eliminate middle men and their take from the process."

But he adds: "We don't expect the record companies to be able to offer more than their own libraries of digital music, somewhat limiting their services' appeal. We also believe that business models predicated on free-standing online music services delivering significant profitability should probably be revisited, unless they have exclusive access to certain types of content."

Drive traffic

Kessler makes a number of predictions and observations about the players in the music download field.

According to Kessler, the greatest value of the iTunes service is that it drives demand for Apple's iPod music devices. "It's helping Apple increase its market share in the MP3-player segment, and Jobs & Co. hopes its success will promote gains in the computer market as well," he says.

He expects the likes of, America Online, and Microsoft to use music-download offerings to "enhance existing products and attract users to their Web sites and services".

In the case of AOL Music and MSN's Entertainment areas he suggests: "Music downloads could be used to supplement the current content and services (such as streaming radio)."

By offering music download services, companies such as Wal-Mart will "drive Web-site traffic and often stimulate use or purchase of associated offerings."

Kessler believes: "Coca-Cola is using digital-music services to create interest and excitement around its brand, particularly with its core teenage consumers."