Can anyone topple Apple?
The company has a huge lead in the digital music market, but some see a chance for rivals to chip away at Apple's core.
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - It's no secret that Apple rules the digital music world.

But does the maker of the iPod and the popular iTunes music store finally have to start worrying about tougher competition down the road?

Apple has a comfortable lead in the online music market but some analysts think potential competition from Microsoft, Amazon and Google could put a dent in sales at iTunes.
Apple has a comfortable lead in the online music market but some analysts think potential competition from Microsoft, Amazon and Google could put a dent in sales at iTunes.
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Could be. In the next few months, the cable network MTV is set to unveil its own music store, dubbed Urge, in partnership with Microsoft (Research). And Amazon.com (Research) is said to be in talks with the major music labels about developing its own digital music shop.

And in what might be the biggest threat of all, Google may enter the online music market. Although the company has not said anything publicly about plans for a music store, Google did launch an online video store in January.

Following that news, Bear Stearns Internet analyst Robert Peck wrote a report predicting that Google would roll out a music store, which he dubbed Google Tunes, in the next few months. There has also been speculation that Google (Research) could buy its way in to the market through a purchase of iTunes rival Napster.

Analysts say that Apple (Research), which announced last month that iTunes sold its billionth download since the store's launch in April 2003, has a safe, comfortable lead in online music for now. But the company is far from infallible.

New gadgets eating into market share?

Phil Leigh, senior analyst with Inside Digital Media, an independent research firm based in Tampa, said that the emergence of cell phones that can play MP3 music files is a threat to Apple, assuming that cell phone makers and wireless carriers want to partner with stores other than Apple's iTunes.

For now, Leigh concedes that most phones are not sophisticated enough to be considered true alternatives to an iPod. But as technology improves and phones are able to hold bigger libraries of songs, Leigh said some consumers may begin to question whether they need a cell phone and an iPod.

"It's pretty clear that cell phones are going to build in more MP3 capability over time and there will be a certain number of consumers who'll say, 'Why should I carry a music player and a cell phone?' " said Leigh.

And since most analysts say Apple's success in the music download business is partly from its strong iPod sales, a dent in Apple's stranglehold on the portable music player market could have a ripple effect in online music.

Along those lines, Ted Schadler, a consumer technology analyst with Forrester Research, said Apple may need to develop a more all-in-one digital entertainment device in order to hold onto its lead.

"Sony sells portable gaming and movies through the PlayStation Portable. That's part of the market where Apple is not strong," he said.

"And if you believe the blogosphere analysis of where Microsoft is headed, it's not going for just a music player but a gaming, music and everything else device. These are credible threats that essentially could hem Apple in because it could appeal to different buyers," Schadler added.

Of course, it wont' be easy for any new rival to make a significant dent in Apple's market lead. The iPod is extremely popular and since most competing music stores, including the soon-to-be-launched Urge, will not allow users to transfer files they download to an iPod, that might limit their appeal.

Beyond the white headphones

Or will it? Schadler said that though iPods seem ubiquitous, he thinks there's room for other hardware competitors. Creative Technology, SanDisk and Samsung all make portable music players as well.

"Our data shows that Apple's share of the MP3 player market is not as big as they would lead you to believe. Nobody reports figures from Wal-Mart and a lot of non-iPod devices are sold there. There is a market for non-iTunes music," Schadler said.

Leigh added that Apple's steadfast insistence on selling music as individual singles or album downloads, as opposed to through a monthly subscription service, cost also hurt it in the long run because the music industry might find that the subscription model is more attractive to them. So that could make record labels more inclined to work with other partners.

"Apple's dismissal of the concept of a music subscription service is a weakness. Music stores that are providing unlimited services for a monthly fee are consistently discovering that consumers are using the service more intensively to discover new artists," Leigh said.

Schadler also said that newer entrants might also market their services more aggressively, with the probable exception of Google, and this could cut into Apple's hold on the digital music market.

"There is no single competitor that's going to bring Apple to its knees anytime soon," Schadler said. "What's going to happen is there will be a lot of nibbles. There will be a whittling away of the edges."

Of course, Apple is not going to lose its dominance overnight. It's still the company to beat. Plus, Apple has already fended off competition from the likes of Napster, RealNetworks (Research) and its Rhapsody service and Yahoo! (Research)

And one media analyst said that even though music companies may be growing wary of Apple's market lead, they still should be thankful for Apple's presence in the market since iTunes at least allows music companies to generate real revenue from online downloads.

"iTunes has almost single-handedly salvaged the economics of the music companies by giving users a legal alternative to file-sharing and for that, I think, music companies are grateful," said Laura Martin, an analyst with Soleil -- Media Metrics, an independent research firm.

"But over time there may be more competition from services that shift the power back to content companies."


So it may be a mistake to think that Apple's share of the music market can keep expanding indefinitely.

Is Microsoft aiming for a handheld media player? Click here.

Apple may faze out its 60-gig video iPod. Click here.

Apple sells its first movie. Click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.