Our take...
The Sky/UMG store is one of a growing number of services to offer music without DRM which is part of a broader trend by the major labels to try to undermine Apple's dominance in the paid online music market by licensing DRM- free catalogues to rival services. Broadly stated, the labels' concern is that, even though the digital music market grew up with, and continues to grow on the back of Apple's iPod/iTunes ecosystem the Cupertino based company has too much power over the prices and perception of digital music, and that growth and revenues could be maximised if there was more competition in the market.

Whilst the trend towards DRM free is now established in the US, the strategy is less developed in Europe. In the UK the stores offering DRM free music include: 7Digital, Play.com, Tesco, iTunes and eMusic, with a launch widely expected from Amazon before the end of 2008. However, while the number of outlets is high the DRM- free catalogue is limited: the majority of services only offer DRM-free music from EMI and independent labels. The JV with Sky is the first time that UMG has offered its catalogue without DRM in the territory, outside its own Classics and Jazz online store. While this is an important development Screen Digest believes that, because of the restricted catalogue, there are significant limits on the appeal that a one-label service can have and that Sky and UMG will have to sign at least one other Major if the service is going to have anything beyond niche appeal.

Beyond the limited catalogue, Screen Digest has reservations about the prospects of the service in its current iteration. The online music market in the UK, like the US, has been hardware driven, which practically speaking has meant iPod-driven. Other services, even those offering DRM free music, have struggled for market share and many have closed. Those services which have found a way to survive have managed to do so with a mixture of price, niche and building on an existing retail customer base.

In its favour the service may well be able to compete on price because it is a JV, thus mitigating the Majors' characteristic wholesale price demands. Certainly, there is a growing trend from the Majors (in particular UMG, SonyBMG and Warner Music (WMG)) who are increasingly taking a stake as a means of gaining value from digital music services with unproven business models. As Screen Digest understands it for the Majors the reassurance of equity allows them to be more flexible with wholesale pricing and licensing costs than they are with third party services. This is important because in a market where Apple has set the de facto standard price for a la carte downloads (based on a model that makes money on hardware and uses content as a break even value add for device owners) the label's traditional attitude to wholesale and licensing costs made it difficult for standalone service to survive.

But, despite the potential price advantages, in launching a service from scratch on a standalone portal it lacks a previously existing user base with a tradition of using the site for retail (in the way that Play.com and Tesco already have buying customers). In addition, it remains unlikely that the service will be able to leverage much of a niche audience (e.g. eMusic, 7Digital's Indy Store) and must compete with a growing number of services entering the online music market. The combination of a 'book club' subscription with unlimited streaming is unlikely to provide the Sky/UMG JV with much of a competitive advantage: unlimited streaming has never proven to be particularly popular in the UK even when attached to an established music brand like Napster, and there are already plenty of sources of 'free to the consumer' music, such as We7 and Last.fm, and the numbers of services are growing. In addition to Amazon's conventional download store, the UK is likely to see Nokia's free at point of delivery 'book club' subscription service 'Comes with Music' and the JV between MySpace and UMG, SonyBMG and WMG offer free streaming before the end of 2008.

Over the longer term even if the service does manage to provide music to the set-top box and start getting bundled in with Sky subscriptions it is quite unclear that, on the current limited downloads model, aiming for the family market will provide much of an advantage. Music is generally an intensely personal purchase, and, as the problems selling domestic broadband combined with mobile phone packages have shown, trying to convert a personal product to a household one is often difficult. Offering unlimited streaming along with a 'book club' subscription is a step in the right direction but Screen Digest believes that, until the monthly download limits are removed, the lack of fit between the personal and the domestic may well prove to be an insurmountable problem if the service is to see significant traction.