Apple's iTunes Music Store stands to win the European download market – though Roxio's Napster service is in the running too, analysts say.

Forrester Research predicts: "The European music-download scene will turn around in 2004. Many consumers who have routinely downloaded for free will become resigned to paying for legitimate services. Portals will benefit first; Apple's iTunes and Napster will win in the long run."

Forrester senior analyst Rebecca Jennings observes that attempts to stop illicit downloading in Europe have failed, urging new commercial digital music distributors to "be patient as the market gradually changes". She expects a wave of legal action by the music industry and the introduction of legitimate services to "cause a watershed" in the market.

The research looks at the OD2-supported portal services, and innovative London-based peer-to-peer service Wippit as examples of the developing European market.

"The various distributors are all trying to establish early-mover advantage in the embryonic European commercial download market. Portals will take an early lead, Coca-Cola will fizz, but most consumer goods firms will fall flat, and iTunes will bite back," she says.

Jennings predicts that portal-based services will dominate while Europe awaits the introduction of iTunes and Napster. Her prognosis for Apple remains positive, however.

"Over time, Apple's ease of use, seamless linking with the hot iPod, and enormous brand traction will see it overtake many of the smaller services in Europe – as has happened in the US. Napster may give it a run for its money in the ease-of-use stakes but will suffer from lower brand awareness in Europe," she said.

Digital music 'turns up the heat'

Digital music distribution looks set to emerge as a 'hot cookie' in the tech industry this year, and because it's a business that is actively watched by consumers, brand and company reputations seem set to be made – and unmade – by success or failure in the space.

Macworld UK is extensively covering this industry sector, what follows is a brief account of some of what has been going on in recent weeks.

European iTunes – keenly anticipated

Music industry insiders expect Apple, Napster and other major digital music services to launch in Europe as soon as the second quarter 2004; however, news from major music industry event Midem last month suggests those involved are being delayed by monolithic levels of bureaucracy within the music business..

The market opportunity is huge. Musician Feargal Sharkey (currently the acting 'Live music Tsar' for the controversial Blair government) said: "Every single period of growth in the history of the music industry is driven by new technology, not the music itself."

On a move to Europe, Apple's vice president of applications and Internet services Eddy Cue has said: "One of the things we are working with the European labels on is to get them to understand how the business works in the online space, and having them change some of their business practices.

"We will be here this year. I'm not going to announce the date at this time, but we are working very hard." Apple expects iTunes Music Store revenues to rise "exponentially", the company has said.

European market – online music's battleground

Empires have risen and fallen in Europe. As the virtual world becomes commonplace, it appears the region may emerge as the focus for the most determined battles between digital music services aiming to create their own empires in this emerging market.

Europe already has one operator capable of serving music across each of its constituent territories, Peter Gabriel's OD2 network. OD2 acts as a virtual music distribution house, its content is bought to the consumer using a number of portals, including, Tiscali, Virgin and MSN, with new operators frequently appearing.

Some competitors are more aggressive than others. Coca-Cola is determined to boost its brand, and the US-only Apple/Pepsi song giveaway that began at SuperBowl has seen a reflex action from that soft drink manufacturer. Coca-Cola will offer 20 million free music downloads to UK customers in March/April 2004. Coca-Cola uses OD2 in Europe.

In the US, Coca-Cola has also teamed up with Apple software partner MusicMatch to announce a partnership in the US. Coca-Cola and MusicMatch are teaming up to promote Sprite with details to be announced later in the year.

It appears all involved in the market are partnering with others as part of their marketing efforts. RealNetworks is working with Heineken, Napster with Miller beer and Sony's service – due for US launch this year – has arranged an upscale partnership with United Airlines.

Apple begins in a good place. It sold ten times as many tracks in the US as its most established future rival in Europe, OD2, sold in 2003 – 30 million songs in the US; 3 million (in Windows Media Audio format) in Europe. OD2 co-founder Charlie Grimsdale said the volume of European music downloads is currently growing 25 per cent month-on-month.

Napster prepares for Euro war

The battle for a slice of the digital music market could grow bloody. Napster CEO Chris Gorog warned delegates at the Midem event to "stay-off the Apple platform". This warning was based on claims that Napster's Windows-based PC platform is compatible with two-thirds of all the mobile music devices currently available.

In an extensive corporate reshuffle a focused Roxio is moving to consolidate its core competencies (Roxio and Toast) with its new Napster business. Recent reports confirm the company's consolidating its US offices and replaced the Napster CEO.

The company has also appointed Leanne Sharman as vice president of business development. Sharman is Napster's first European executive and will spearhead the company's expansion into Europe from her London base. She is the former vice president of sales and marketing for the now defunct in Europe.

UK – a strategic battle?

Europe's music wars may well be settled in the UK. A staggering one-in-six iPods sold over the Christmas period worldwide shifted in the UK market. In the region of 125,000 iPods sold here. Apple shipped 730,000 iPods globally in the period and has shipped over two million of its popular music players since the product launched.

The UK's Performing Rights Society (PRS) – the group that distributes performance royalties to artists – reports that it expects to net £10 million for 2003; this is the highest revenue the society has collected in the 90 years since its inception.

Finally the UK's thirst for music is growing: official UK music sales figures show that album sales here rose by 7.6 per cent, with 121 million artist album sales – not including compilations – an all-time high for album sales in this territory.

The music industry is ready to deliver digital music in Europe. IFPI chairman and CEO Jay Berman said: "In 2004 there will be, for the first time, a substantial migration of consumers from unauthorised free services to the legitimate alternatives that our industry is providing internationally."

HP/Apple – the games gets global

HP and Apple announced a partnership of global importance in January. HP will release an own-branded digital music player based on Apple's market-leading iPod and will ship iTunes pre-installed on its PCs.

HP CEO Carly Fiorina explained: "HP's goal is to bring the most compelling entertainment content and experiences to our customers.

"We explored a range of alternatives to deliver a great digital music experience and concluded Apple's iPod music player and iTunes music service were the best by far. By partnering with Apple, we have the opportunity to add value by integrating the world's best digital music offering into HP's larger digital entertainment system strategy." The device goes on sale in June – HP is the world's biggest PC company with 17 per cent of the home PC market.

The deal means variants of Apple's music player will be available in 110,000 retail outlets worldwide, rather than the 8,000 you'll find iPods in today. Apple will sell more iPods – and this news creates what could become the biggest conflict of all: Microsoft's desire to transform its Windows Media Audio software into the de facto industry standard for digital music sales.

The HP partnership drove USA Today to declare Apple has "won the first round of the digital music war" against Microsoft. HP also confirmed it has no plans to support Windows Media Audio in its iPod.

Microsoft dominates the desktop, with 90 per cent market share, Apple's deal with HP punches a hole in the Windows hegemony. With both companies offering incompatible file formats for digital music, the public get to choose between trust, or anti-trust.

Trust, or anti-trust: the format wars

Despite the blow, Microsoft won't falter in its attempt to extend its desktop dominance into new digital industries. Microsoft's Windows Media division general manager David Fester said the HP/Apple deal will confuse customers, because purchased tunes won't be in a Windows format.

He told journalists at the Consumer Electronics Show in Las Vegas: "Windows is about choice - you can mix and match software and music player stuff. We believe you should have the same choice when it comes to music services."

Universal Music's eLabs president Larry Kenswil told Macworld: "Microsoft is down on Apple's format because it's not Microsoft's format". Microsoft wants to be the industry dominant format, he agreed.

Despite the appearance of numerous online music sellers that support Windows Media, Apple still holds 70 per cent of the market.

Needham & Co analyst Charles Wolf observed: "Consumers have been indifferent to the wide range of stores and players that use Microsoft's Windows Media format. They regard these stores and players as inherently inferior" to the Apple equivalents, he says.

The Financial Times recently declared that Apple's iPod and iTunes could be set to become one of "the de facto standards around which whole markets are built", as long as it continues to widen the market for its products.

The report concludes that Apple must license its technology if it is to become the dominant platform. According to Michael Cusumano, a professor of management at MIT (Massachusetts Institute of Technology): "If Steve Jobs was serious about establishing the platform for digital music he would be licensing the technology. You have to wonder whether they really understand platform dynamics."

Why can't you just be friends?

Whatever the long-term digital media strategies of Apple and Microsoft, both companies are likely to be placed under pressure to cooperate.

Yankee Group senior analyst Mike Goodman says Apple's Advanced Audio Coding (AAC) format may be dominant now, but warned that Microsoft's Windows Media Audio (WMA) format will take over as more players come to depend on it. "Incompatibility issues are likely to cause increasing consumer dissatisfaction," he said.

Warner Music VP strategic planning and business development Paul Vidich has said: "There's substantial discussion going on about interoperability." The report suggests the focus of such efforts is the development of solutions that let secure formats – such as Apple's implementation of AAC and Microsoft's Windows Audio – be transcoded from one to the other, securely.

This may be Apple's Achilles Heel; Jobs in November 2003 dismissed the idea of repurposing Apple's music player to support other standards: "Why should we work with another music store when we are working with the Microsoft of music stores?" he asked.

The weakest links

Two serious chinks exist that could transform the entire landscape:

First, an outstanding lawsuit against Roxio (and others) regarding patents for CD burning.

Second: the European Commission's reported decision that Microsoft has acted monopolistically in the digital media market to extend the reach of Windows Media at the expense of competitive products.

Microsoft's actions in Europe to support WMA may well be hindered by its desire to resolve the latter case, and to avoid the EC fine – which could be as high as ten per cent of Microsoft's annual revenues.

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