International Data Corp predicts fee-charging online-music providers could yield revenues up to $1.6 billion by 2005 – but success will depend on a broad content giving consumers flexibility.

Although consumers are hungry for online music, the fate of music subscription services and pay-per-download providers is largely in the hands of the labels and how they choose to license their works, IDC said. Providers that do not offer content from all of the major labels will lose out, as consumers have come to expect as much music online as offline.

"Consumers need to be able to get music in a place that resembles an online version of a music store, where they don't need to know which artist belongs to which label to find the music," said IDC consumer devices and technologies analyst Susan Kevorkian.

Players While major labels are eager to get a share of the online market, and are busy launching their own subscription services, their licensing practices are coming under scrutiny. Earlier this year, the US Department of Justice launched a preliminary investigation into major-label-backed subscription services MusicNet and Pressplay – reportedly over monopolistic concerns. MusicNet is backed by AOL Time Warner, Bertelsmann, EMI and RealNetworks, while Pressplay was formed by Vivendi Universal and Sony Music Entertainment.

In addition to licensing concerns, the other factor holding online-music providers back is flexibility. As it stands today, labels are reluctant to let users burn CDs and move content from PCs to MP3 players. This needs to change, said IDC, if the online providers want to attract and retain users.

Apple's move into the digital-music market with the release of iPod may have some risks, but the market is a potentially lucrative one for the company, observers claim.

Kevorkian thinks it will be a couple more years before the labels agree to allow user-flexibility and wide licensing of their works. However, she is optimistic about the market, given the strong consumer interest.

Kevorkian said: "This is still a very young technology and it will take time for the market to develop. But the bottom line is that people love music and this is an efficient way for them to get their dose."