Not in our backyard

A year on from its launch and we still can't get Apple's music store in Europe. Meanwhile, the competition is moving in, says Charles Arthur. What's going on?

Apple's iTunes Music Store turned one year old last week - but only in the US. Its European counterpart is still nowhere to be seen, even though the incentive for Apple to launch it could hardly be greater. With thousands of Britons who snapped up iPod digital music players last year as potential users of the service, Apple is in effect losing business with every day that passes.

Apple's iTunes Music Store turned one year old last week - but only in the US. Its European counterpart is still nowhere to be seen, even though the incentive for Apple to launch it could hardly be greater. With thousands of Britons who snapped up iPod digital music players last year as potential users of the service, Apple is in effect losing business with every day that passes.

In the meantime, rival download services - which sell songs that cannot be played on the iPod, because they are encoded with "rights management" software that only works on Microsoft Windows - are gaining ground. OD2 and Wippit are selling hundreds, perhaps thousands of songs every week; Wippit in particular has signed up both EMI and BMG as well as scores of independent labels, and is already distributing their catalogue through its legal peer-to-peer service. The now-legal Napster also plans a service for the end of the summer, says Chris Gorog, its chief executive.

But Apple has not set a European launch date. Though its chief executive Steve Jobs said last week it would arrive "later this year". The absence of Apple from Europe seems remarkable, given its dominance of the US download market, where independent estimates suggest it has 70 per cent of the legal download market, as it is now selling around 2.4 million songs every week, and 70 million in the past year. It achieved that by signing up all five record labels; its US catalogue numbers more than 700,000 songs. And in Europe, none.

That has created a new game inside Europe's computer and record industries: explain the delay. Is it rows with rights organisations? Its lawsuit with the Beatles' management company, Apple Corps? Well-placed industry sources outside Apple say not. The real reason, they reveal, is that the record companies are now scared that the European iTunes Music Store will dominate rivals here too - and dictate the future direction of online music.

"There's a fear that [record companies] can't let Apple do the same here [in Europe] because then they would dominate," said one source familiar with negotiations, who insisted on anonymity. "You'll see Apple get delayed and delayed as companies like Wippit and OD2 and Napster are encouraged [by record labels] to grab market share. [Labels] aren't meant to collude on things like this, but the big fear is that just as MTV got music videos for free and then dominated the music industry, because it could make or break stars by airing their songs, so Apple could do that online. The older music executives, who remember the lesson of MTV, don't want to be over a barrel again with a big provider."

The upshot of that, though, could be that Apple will be forced to adapt the iPod to play files from rival stores - or eventually be squeezed out of the digital player market.

No other reasons put forward for the delay would have held back Apple, which has had more than a year to negotiate deals. The lawsuit with Apple Corps, over Apple Computer's move into music, could be settled either way; but if Apple Computer loses it could surely afford to pay any fine from its $4bn cash pile.

Suggestions that the delay is caused by disagreements with the MCPS [Mechanical Copyright Protection Society], which collects royalties when a physical or digital copy of a song is sold are also untrue, said Adrian Crookes, the spokesman for the MCPS. "We charge 8 per cent of revenues," he explained. "It's a flat rate across Europe. So for a track costing £1, eight pence would be payable to the MCPS." The MCPS rate applies Europe-wide, because there are reciprocal arrangements with other countries; that means Apple could sign an MCPS deal, set up a UK online store and sell tracks for €0.99 across Europe without a murmur. And given those reciprocal deals, songs from other European countries could be sold in the UK too.

But to do that, Apple needs the music - and for the labels to sign up and let it sell them. In retrospect, the music companies never expected Apple's US success. Only a few million machines had the capability to run the OSX software needed to access the store when it was launched. And the record companies had previously tried and failed to sell music downloads through on the tens of millions of machines running Windows. Why should Apple succeed where they had failed?

But instead of selling in proportion with Apple's single-digit market share, the iTunes Music Store saw explosive growth: ten million in four months, and 25 million by the end of the year, and 70 million now. "iTunes has exceeded our wildest expectations during its first year, charting a new direction for the music industry," said Jobs last week. But possibly the labels are not happy about that direction. Others in the business query whether the online business can succeed, even while acknowledging that digital music players - of which the iPod is just the best-known - are encouraging people to listen to more music, in more places, than before.

"The way that people consume music is changing," agrees Steve Gallant, product manager for HMV Records. "But in other respects, it isn't. Five years ago people would have said that we should be shutting shops, that everyone would be buying music online by now. But only about 4 per cent of music is even purchased online; most people buy in stores. A lot of people check out online to see whether to come to the store."

Galant is dismissive about the size of the download market, and its influence. "In the UK it's very, very small. The top bundle of songs sells 100 copies a week. Compare that with 250,000 nationwide for the top-selling album in a store. In fact, we will be opening 25 new stores this year, because the demand is there.

"It's not all going to switch to being online in the foreseeable future. People might download songs, but if you're going to buy a collection then you're probably going to want the sleeve and notes, rather than a bundle of tracks that you just download."

He also thinks that physical stores do more to encourage artists than online ones: "They just see music as content to be sold." And some in the industry think that the rivalry will kill off online stores, leaving the physical ones in place with solid profits. "I can't see how anyone can make money selling downloads for 29p," said Dirk De Clippeleir, the director of new formats at Universal Music. "The online business model is evaporating before it's even taken off."

But Paul Myers, the founder and chief executive of Wippit (which offers the 29p tracks, including OutKast's huge hit "Hey Ya!") insists that he is making money at that price: "After you take off VAT, we split the remaining 21p equally with the rights holders. They've agreed to sell at that price; we're not doing some mad loss-leader."

For Myers, every track sold through Wippit is another not sold by Apple - and another piece of ground gained by the Windows Media Audio (WMA) format protected by digital rights software, which the iPod can't play. "I've got an iPod myself, but I'm thinking about getting something else because I can't play songs from my own service, only my own CDs," said Myers. "Apple has this problem - it's always been stubborn about opening up. I'm not sure how long the iPod can be dominant without two things - playing locked WMA files, and Apple letting other companies use its 'Fairplay' digital rights software."

But Jobs rebuffed exactly that suggestion by Rob Glaser, the chief executive of Real, a fortnight ago. And to play Microsoft formats on the iPod might seem to him like an admission of defeat. "Apple has always preferred to have 6 per cent of the top, rather than a royalty from everything like IBM does," said Myers. "But to keep on top now, they'll have to widen their scope. There's no other choice."