Can Verizon VCast take on iTunes?

Verizon Wireless has upped the ante in its efforts to take on Apple's iTunes store in the digital music market by offering DRM-free music for all purchased music plus a new subscription service. But will it be enough to make a dent in Apple's dominance?

On Monday, Verizon Wireless will announce the revamped VCast music store, which will be loaded with digital music that is free of the pesky digital rights management encryption on all songs that are purchased through the store. Verizon is joining Amazon as the only other digital music distributor that will be selling DRM-free music from all four of the major record labels, including, Sony BMG, Universal Music Group, Warner Music Group, and The EMI Group .

The company is also offering its first ever music subscription service courtesy of its relationship with Real Networks' Rhapsody America service. Verizon announced it was partnering with Rhapsody last year. And through this partnership, the company has redesigned its music store and the VCast user interface.

The new service clearly puts Verizon Wireless in a new category when it comes to digital music. Verizon cell phone subscribers as well as nonsubscribers can download the DRM-free music onto a PC and sync it to any MP3-enabled device for $0.99 a song. Songs can be purchased over Verizon's cell phone network onto a Verizon phone for $1.99 a pop. And the new VCast service also allows Rhapsody subscribers to sync their phones to the subscription service, much the same way AT&T subscribers can access the Napster subscription service.

But even though it has potential to become a major player, it's still unlikely that the cell phone company's moves will have much impact on market leader Apple. Instead, experts believe that Verizon is much more likely to help grow an already underperforming market.

"The issue isn't whether Verizon can take down iTunes," said Russ Crupnick, a senior analyst at the NPD Group. "But rather, can it help grow the market? And I think the answer to that is yes. Verizon is very well-positioned for that."

The music industry is in dire straits. Sales of CDs have been plummeting over recent years, and the industry hasn't been able to make up for the losses through digital distribution. Apple is by far the leader in digital downloads, hitting the 5 billionth song download mark from its iTunes music store just a couple of weeks ago. According to Crupnick, over three-fourths of the full music tracks downloaded come from the iTunes store. Amazon is a distant second, with other players such as Wal-Mart trailing even further behind.

So far, freeing music downloads from DRM protection hasn't done much to move the needle. Amazon and Wal-Mart have been offering DRM-free music for almost a year, and they still lag behind Apple. The reason for this could simply be that Apple is so far ahead in terms of market share that few people have reason to see DRM protection as a problem.

"When you have 80 percent market share on Apple devices," Crupnick said, "there isn't much demand from people to get unprotected music. They don't seem to encounter any issues with it."

Ed Ruth, director of digital music for Verizon, said that the company is simply trying to offer customers choices.

"Of course we recognize that Apple has done a great job," he said. "They have helped tell the digital music story quite well, and they've tilted the ecosystem in one direction. But in some ways they have trapped people into one experience. And that's the problem we're trying to solve."

Meanwhile, Verizon could also have an uphill struggle in getting people to use the Rhapsody subscription service, which costs about $15 a month for unlimited access to millions of songs. In the online world, only a small niche of music aficionados use services like Rhapsody and Napster. And so far, the model hasn't proven to be much more successful in the mobile world. AT&T has been offering the Napster music service, and even though the company hasn't published figures on how many customers are using the service, analysts say it hasn't been a runaway success.

But some analysts think that a service that does a good job of integrating Verizon's VCast with Rhapsody could help attract new users to the subscription model.

"If they can make the experience of Rhapsody on a handset complimentary to what they are already doing with VCast, I think it will make Verizon a stronger player by attracting new music subscribers," said Susan Kevorkian, an analyst at IDC.

While Verizon may never be able to beat Apple in the online music game, there's reason to believe that the company could beat out its fellow cell phone carriers and other music downloading services for market share. And in such a nascent market, Verizon still has an opportunity to make a significant amount of money from its music store and help move the carrier away from simply being a phone company.

Verizon claims that record labels have told it that in terms of revenue, it is already second to Apple when it comes to the money that is made from full track downloads. And in a recent survey of Internet users conducted by NPD Group, Crupnick said that over half of the respondents had heard of the VCast music service. This was higher than awareness for music services from other cell phone companies such as Sprint Nextel or AT&T. But it was also higher than some well-established music brands, such as Microsoft's Zune music store, Rhapsody, and Napster. Still, only about 7 percent of the respondents said they had ever used the VCast music service to download songs.

But Crupnick believes this consumer awareness could someday translate into growth for Verizon's VCast service. Verizon also has other attributes that some of these other music distribution channels don't have. In addition to selling full track songs, Verizon is also able to help the record labels monetize the same songs in multiple ways by selling ringtones, ring-back tones, and wall papers of the artists. The company has even begun working to help produce some albums using a mobile recording studio.

What's more, Verizon has access to a wide variety of music playing devices, something that Amazon and Wal-Mart don't readily offer themselves. And it already has an established billing relationship with most of the customers that will likely use its site to download music. All of this bodes well for Verizon. But is it enough to really challenge Apple's dominance?

The answer is probably no. But it could be enough to make it a strong alternative. At the end of the day, Verizon's Ruth said that it's all about forming good relationships with the music industry and providing a great service to customers.

"Our approach is to be as good a partner to the music industry as we can be, " he said. "And we always keep the customer experience and expectations in mind when designing and delivering the service. I think we've done that so far and as a result have earned the trust of our customers."