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How eMusic hopes to keep Its groove

The path-breaking digital music service embraces social networking.

By Devin Leonard, senior writer
July 16, 2008: 2:06 PM EDT

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David Pakman, eMusic's chief executive, is talking to major record labels, but says he doesn't need them for his site to do well.

NEW YORK (Fortune) -- When eMusic launched 10 years ago, the online music subscription service faced some long odds. It refused to protect songs from illegal copying, which ruled out major label acts like Britney Spears.

But a funny thing happened on eMusic's way to Internet obscurity: it thrived. For years, it was the only online music store aside from iTunes that sold songs that are played on the iPod. That's because the record labels required services to use Microsoft's copy-protection software if they wanted to sell their songs.

Today, eMusic has attracted more than 400,000 customers - a 60% increase from a year and a half ago - who pay as little as 33 cents a download for songs they get to keep. The site still doesn't do business with the major record labels, but it has deals with 33,000 independent labels and a catalogue that includes Radiohead, Paul McCartney and John Mellencamp.

For all its success, eMusic faces stiff challenges. The worldwide digital music business is expected to grow to $23 billion in 2011, up from $17 billion this year, according to PricewaterhouseCoopers. That estimated growth, coming as CD sales continue to plunge, is attracting a lot of competitors.

Rival services like Amazon now sell iPod-compatible songs. MySpace is launching a music service this year supported by the big four record companies; SonyBMG, EMI, Universal and Warner Music (WMG). What is eMusic doing in response? Next Tuesday, it is introducing an array of social networking features to its service.

Let's say you are a fan of Arcade Fire. You can already read quite a bit about the critically-acclaimed Canadian cult band on its eMusic album pages. Now eMusic will add a wealth of content from the Web 2.0 universe: the band's Wikipedia entry, pictures from Flickr, and videos of Arcade Fire concerts from YouTube. None of this is available on iTunes or the Amazon digital music store.

eMusic will also allow members to share these pages with friends on popular social media sites like Facebook, Digg, Del.icio.us and Twitter. "These are the things that we know our customers are already doing with the music they love," says eMusic CEO David Pakman.

Pakman is sanguine about eMusic's prospects in the face of mounting competition. His goal, he says, is to make sure eMusic remains compelling at a time when his customers have other options, including thousands of MP3 blogs. "Our concern is that retail space is becoming less relevant because of all these other discovery tools," he says.

Susan Kevorkian, an analyst at IDC, applauds eMusic for adding features that she believes will make it easier for subscribers to connect with other like-minded music fans.

But she also says that the company "is a little bit late to the game" when it comes to social networking. She points out that iMeem, which describes itself as a social networking site with a heavy music component, is already doing some of the things eMusic is putting into place. MySpace, with 120 million users worldwide, will likely add similar features.

Pakman thinks eMusic's big advantage is its pricing. New users pay $11.99 a month for 30 downloads that they can keep. That's a lot cheaper than either iTunes or Amazon. Subscribers also get to keep these tracks. That isn't the case with most Internet music subscription music services. (eMusic, which has been owned by private-equity firm Dimensional Associates since 2003, doesn't release financial data.)

And eMusic provides its members with tons of data about its music, some of which is fairly obscure. (Anybody for Slovenia's "Bratko Bibic & The Madleys?") That helps its labels move more songs. Jesse McCann, digital operations manager for Allegro Media Group, a music distribution company in Portland, Ore., says his company makes about the same amount of money selling songs on eMusic as it does on iTunes: "I'd say our eMusic check is about the same as our iTunes check."

eMusic's customers think the site has a bright future. "Our outlets are becoming smaller and smaller especially with the decline of traditional retailers," says Clayton McDonnell, executive vice president of MAXJAZZ, a St. Louis-based jazz label. "So we look more and more to sites like eMusic to offer our music, not just our new releases but our catalogue."

That shift has helped eMusic sell more than 200 million downloads in the last four years. "That's a drop in the bucket compared to iTunes," say Kevorkian, the IDC analyst. "But it's pretty respectable for a service that only sells independent music."

It may not always be that way. Pakman says he frequently talks to the big guys. These days, eMusic negotiations with them are about price, not copy protection. But Pakman is in no hurry to sign any contracts. "If we never get any major label content, this is still a very successful company," he says. To top of page