Time for Digital Music to Get a Reality Check

It’s been a busy September for the digital music business. Steve Jobs reappeared onstage to introduce the iTunes LP format and a series of new iPods. Anticipation grew around European streaming music service Spotify, which is due to arrive on U.S. shores in the coming months. And a series of mobile music applications that compete indirectly with the iPod were approved by the very company that makes the device. So it seems like a good time to assess the chances these key music models that have received so much attention and investment have of surviving.

Selling music online: Apple (s AAPL) still owns more than two-thirds of this market, with largest challenger Amazon.com (s AMZN) still only accounting for single-digit market share. Interest in owning music could decline in some circles as streaming services improve, especially in the mobile sphere, but any erosion is likely to be slow, and physical media customers are still moving online, too. Selling MP3s is a low-margin business, but as part of a larger one — selling gadgets, as Apple does, or barbecue grills, as Amazon does — it’s worth staying in the game. Anyone else, though, would be crazy to enter this market and expect big returns. As for the price of music, expect increased flexibility, especially for developing artists. Prognosis: Stable, for now.

Free on-demand streaming: Thanks to a user interface that echoes Apple’s, much-hyped Spotify is the purported game-changer in what’s shaping up to be a three-horse race alongside Imeem and MySpace Music, with user interface emerging as the most significant factor in determining a winner. (Google’s (s GOOG) YouTube is running a different race, but on the same track.) Major labels have stakes in all three providers, and have generally been disappointed with the returns thus far, in part due to the soft ad market. Some or all may reach profitability amid reduced expectations, but none is likely to produce a strong exit for stakeholders. Prognosis: It’ll pull through.

Paid subscriptions: The all-you-can-eat music rental service is getting a shot of adrenaline by going mobile. The two leaders, RealNetworks’ (s RNWK) Rhapsody and Best Buy-owned (s BBY) Napster, have had difficulty reaching even a million customers despite several years of trying, and the price of music rental is falling, but the promise of any song, anytime, anywhere via mobile apps is leading to a make-or-break moment for these services, especially with Spotify entering the fray by applying the “freemium” model. If ubiquitous music access doesn’t revive the subscription service, nothing will. Apple, for one, has conspicuously stayed out of it so far. Prognosis: Requires experimental treatments.

Internet radio: A new royalty rate agreement this summer stabilized market leader Pandora and its ilk for the next few years. Pandora’s own service is beloved enough, but its stakeholders may never get the payoff they’ve been waiting for, and what happens after 2015 is anyone’s guess. By comparison, rival Last.fm’s exit strategy — getting acquired two years ago — was the best one. Prognosis: “I’m not dead…I’m getting better!

Legacy businesses: Believe it or not, CD sales are still outpacing digital downloads, although the twain shall finally meet next year. The Beatles, for one, are doing all right selling physical product to diehards. The independent music business, in particular, is even enjoying an uptick of interest in vinyl. Prognosis: The old boy’s got some life in him yet. 

Piracy: With a 95 percent market share for downloaded music, this is as close to a sure thing as I can imagine. Yeah, growth in free streaming might reduce piracy, and people are going to jail for leaking music early. But if anything, music piracy may be getting easier. Prognosis: Thriving, with a chance for eternal life.