In the next month, a wave of new services offering music, videos and games will break onto the Net, sticking a price tag on products many consumers are used to getting for free online. More than half a dozen outlets, including some of the biggest names on the Net, will be launching subscription services for the first time. Most will focus initially on music, offering consumers legal downloads or streams of major-label recordings in hopes of capturing a sliver of Napster's former glory. But video and gaming services are also on their way. An inspiration for many of the new services is RealNetworks' GoldPass, recently renamed RealOne, a content-subscription channel that has drawn hundreds of thousands of paying customers in the past year. Companies from AOL Time Warner to Yahoo! hope to replicate that service's early success. The entrance of many well-funded competitors into the field could hurt RealNetworks by substantially raising the cost of exclusive Web programming that has been GoldPass' main draw to date. But the newcomers will face significant challenges in catching up to RealNetworks in an unproven marketplace: Most will launch with strikingly similar music content that is widely available for free over peer-to-peer file-swapping communities such as MusicCity and Kazaa. In addition, distributing content online has so far proven prohibitively expensive, handing RealNetworks a potential cost advantage since it owns software, streaming technology, a content-delivery infrastructure, and even part of the company that will be delivering music for other services. "We're going to see a market evolving where there will be lots of services that emulate the GoldPass model," said Ryan Jones, a research analyst at The Yankee Group. But most of these services could face financial difficulties that have little effect on Real, which "has spent the last five years building up its infrastructure," Jones noted. The subscription strategy is viewed by many companies as the salvation for a medium struggling to subsist on driblets of advertising revenue. In typical Net form, a rush is on to establish a consumer foothold, with everyone from Yahoo! and Microsoft to major-label owners such as Sony and Bertelsmann entering the race. A mixed set of lessons
GoldPass -- with a new look and a new programming lineup to be unveiled next month -- is undisputedly the leader in this arena. But its early gains have come in an environment with little competition. Its longevity will be tested as consumers see more demands on their wallets from other online content services. Launched in September 2000, the service has drawn more than 400,000 customers who pay $9.95 a month for access, according to RealNetworks. There is still a relatively small selection of content on the service, but RealNetworks has scored a few coups, such as live, exclusive Internet audio broadcasts of professional baseball and basketball games, as well as outtakes from CBS' "Big Brother" and "Survivor." GoldPass produced $18.1m for the first nine months of 2001, according to securities filings, accounting for more than a fifth of RealNetworks' revenue. That has provided a needed boost to RealNetworks' bottom line as its advertising, media hosting and software licensing revenues have plunged. The company says that subscriber cancellations have remained low, despite its focus on seasonal sports and TV content. Research firm Envisioneering, which has done interviews with GoldPass subscribers in California and the Northeast United States, said that cancellation rates appeared to be about 1.5 percent a month, or about half that of cable and satellite TV. Those numbers, however, do not reflect cancellations at the end of baseball season, which closed a few weeks ago. RealNetworks itself does not break out churn rates. Hits help, but aren't enough
The GoldPass history does carry a few lessons for companies launching their own subscription plans over the next few weeks and months. But not all of the company's experiences translate completely. On the content side, RealNetworks has aggressively sought a few exclusive partners -- as in its three-year, $20m deal with Major League Baseball -- that have served as the biggest customer draws. The company does not release actual traffic figures but says those marquee items have drawn heavy usage. Analysts say popular niche content such as this has been a boon for RealNetworks, and that other services are likely to start looking for similar draws. Microsoft has already done a deal to broadcast hockey online, but other potentially popular events, such as international soccer games, remain outside any service. This single-subject content isn't enough to support a subscription service alone, however. Particularly as competition mounts for consumers' dollars, services need to have a breadth of options to distinguish themselves, analysts say. "Consumers are increasingly looking to consume media in a single place, as opposed to downloading music from one source and streaming Webcasts from another," The Yankee Group's Jones said. RealNetworks has played to this desire, offering a wider range of nonexclusive content through GoldPass in addition to its big-name draws. It will add more "channels" as it launches RealOne, the successor to GoldPass. The add-on option of music downloads and streams through MusicNet, a venture with AOL Time Warner, EMI and Bertelsmann, will also be available. The company says subscription services need this mix of exclusive content to draw people in, as well as lower-profile programming to keep them once they're there. "Exclusivity is an expensive proposal," said Mark Hall, RealNetworks' vice president of programming. Seasonal "hits" must be supplemented, or the business would fall apart in the off-seasons, he added. "A subscription-based business has to be more stable than that." By contrast, many of the subscription services now launching are focused exclusively on music. Because many draw from the same two sources -- MusicNet and Pressplay, another wholesale venture backed by Sony and Vivendi Universal -- many of them will be differentiated only by marginal features and not by the type of content they offer. But the music business sees the potential for a similar mixture of hits and low-profile content that could create a stable service. People might sign up to get online access to the latest Britney Spears or U2 album and stay onboard for constant access to lesser-known artists. Paying for the pipes
More daunting from a financial perspective might be the cost of running infrastructure for a subscription service like RealNetworks'. The company has spent the last several years building what it calls the Real Broadcast Network, a content-delivery architecture similar to Akamai Technology's or Speedera's that allows content to be streamed at high quality without running into network traffic jams or other interruptions. Again, RealNetworks does not break out costs or revenue from this part of the business. But analysts say that controlling this part of the delivery system saves the company some money and gives it valuable insight into the process of distribution that rivals will lack. Previously, the simple costs of bandwidth and of hiring a company such as Akamai had been a huge part of any company offering audio or video online. RealNetworks has spent years building the infrastructure for delivering the content and can take advantage of network costs that have been amortized over that period. Bandwidth costs are falling precipitously, however. Jupiter Research estimates that the cost of transporting data has fallen by about 50 percent in the past year. Many companies, including Yahoo!, have decided to simply buy once-pricey dedicated bandwidth instead of investing in their own content-distribution networks. This is less of a concern for companies offering music instead of video programming. Audio is much less bandwidth-intensive than actual video feeds. But falling bandwidth costs are still one of the best bits of news for companies planning subscription services. EMedia chief executive Al Barber, whose company recently picked up the deal to carry Webcasts of National Hockey League games for Microsoft's MSN Internet portal, said bandwidth costs are dropping to the point where his company has actually become cash-flow positive, once a rarity among streaming media services. Analysts do caution that subscription services are based on a lot of guesswork and faith for now, however. RealNetworks may be unique with its baseball and TV deals. Other companies are moving slowly to see if they can replicate the experience with other content. "The bottom line is that it's very early on to figure out what works," said P.J. McNealy, an analyst with GartnerG2, a division of the Gartner research firm. "Everybody's taking baby steps." For everything Internet-related, from the latest legal and policy-related news, to domain name updates, see ZDNet UK's Internet News Section. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the Telecoms forum. Let the editors know what you think in the Mailroom. And read other letters.