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Digital media market to fragment after EC ruling
Reuters, 03.23.04, 1:06 PM ET
By Lucas van Grinsven and Bernhard Warner

AMSTERDAM/LONDON, March 23 (Reuters) - The European Commission hopes for a wide-open digital media market after its proposed ruling that Microsoft cannot bundle its music player with Windows.

Ironically, the move is likely to inflict short-term pain on consumers, the very people the EU is trying to protect, observers say.

The ruling, scheduled for Wednesday, could mean consumers will have to deal with a more fragmented market where they have to be very careful to check the conditions before buying or storing music or film.

Over the last two years, music retailers have started selling songs on the Internet, and many of them have selected their own technology that works only with specific devices.

Songs from Connect will play on Sony walkmans, iTunes Music Store works with an Apple iPod portable jukebox and MSN Music Club from Microsoft works with Rio, iRiver or Creative Nomad digital music players.

Consumers who buy their songs on the Internet, cannot swap the track to devices linked to rival shops. It is like buying a compact disc that plays only on consumer electronics from Matsushita's Panasonic or Samsung.

NEW DEMANDS

The European Commission, in an antitrust ruling due Wednesday is expected to demand that Microsoft strip its Media Player from its dominant Windows operating system for personal computers and fine it 497 million euros ($611.20 million).

Analysts point out the irony of the European verdict: a ruling against Microsoft could add to consumers' frustrations as it would support a fragmented media market and extend the ongoing format wars.

"What these investigations are saying is they want to encourage a level playing field. And by that, they mean multiple platforms from multiple companies," said David Smith, a Gartner Research analyst and specialist on Microsoft software.

"No one ever said that these efforts -- either by the United States or the European Union -- is being conducted in the best interest of the consumer."

The limitations of where Internet music downloads can be played dominates many online forums. "I'll continue to buy CDs for now," one person wrote in a discussion group dedicated to the digital media format wars.

FRAGMENTATION OR MONOPOLY?

Competition Commissioner Mario Monti points that consumers are, in the end, worse off if one company like Microsoft dominates a market. That includes the gates to all digital content, ranging from personal pictures to music to home movies.

"In the end I had to decide what was best for competition and consumers in Europe," Monti said last week.

Microsoft has said it will appeal a negative ruling.

Rivals, meanwhile, hope to capitalise on Microsoft's setbacks by opening new stores. There aim is to build a base of loyal customers for what is expected to be the primary way all consumers will view films and listen to music in the future.

Last week, Sony announced the European launch of its Connect store in June. Fittingly, it will work only with Sony's own Atrac compression software and Open Music Gate anti-piracy protection.

RealNetworks opened its download shop in January. It uses the AAC format, the same used by Apple's iTunes to compress songs, but combining it with Real's own Helix anti-copying software.

The balkanisation of the digital media landscape has left both electronics makers and consumers baffled. Their only hope is that the technology titans agree to work together so that one device will work with all digital media providers, analyst say.

Electronics makers are quick to point out they will have to pay up every time they include another decoding technology, while other technologies are not even available for licensing.

"We support many media formats. The question really is how much do you want to pay in license fees," said Frans van Houten, co-chief executive at Philips' consumer electronics arm.

Robert Ashcroft, Sony's European boss of Network Applications and Content Services, believes consumers will just have to learn to live with the scenario where they have to buy multiple devices if they want to buy from multiple shops.

"It's the way the world works," he said.

It will take years for market forces to determine a single technology platform -- as the compact disc is to music and DVD is to film, Ashcroft added.

Doubts abound that public authorities can speed things up. "Can Brussels break this deadlock? I don't think so," said Jupiter Research analyst Mark Mulligan in London.

Copyright 2004, Reuters News Service
http://www.forbes.com/markets/newswire/2004/03/23/rtr1308796.html