Microsoft, MTV Share Urge to Upend iTunes

Eyeing the sweet spot of the digital music market now all but cornered by Apple's (Nasdaq: AAPL) iTunes Music Store, Microsoft (Nasdaq: MSFT) said it would partner with Viacom's (NYSE: VIAb) MTV Networks to release a new online music service known as Urge.

Urge is slated to launch early in 2006 and will be integrated into upcoming versions of Microsoft's Media Player. The service is aimed at leveraging MTV's brands -- including VH1 and Country Music Television -- and its relationships with record labels and the music industry to give Microsoft an instant leg up in the digital music world.

More Than Just Music

The service will launch with more than 2 million songs and offer additional features, such as MTV programming content and tools meant to create what an MTV executive called a "musical playground." It is expected to offer both pay-per-song downloads and subscription services.

"By combining our expertise in digital media with the music leadership and marketing savvy of MTV Networks, we have created a powerful and unique way to experience music," said Blair Westlake, Microsoft's corporate vice president of media technology and convergence. "This landmark collaboration will bring innovative new experiences to millions of music fans."

The agreement -- financial terms were not released -- calls for Urge to be promoted across the MTV Network family of TV stations, which Viacom said reach some 165 million viewers each month. The service will be trotted out at the International Consumer Electronics Show in Las Vegas next month.

Analysts said the move was a coup for Microsoft, since MTV could have chosen to use Apple's technology to operate its music store. MTV is expected to heavily promote the service to its audience base of teenagers and young adults -- the same demographic that accounts for the most digital music downloads.

The iPod Problem

But some see difficulties in cracking that demographic because it's also the age group that appears most enamored of the Apple iPod. Songs from the Urge service will not be compatible with Apple's category killer MP3 player, possibly reducing the market for Urge to those with other compatible players, those who haven't yet bought a portable music device, or those willing to make a switch.

The deal is the second high-profile hookup for Microsoft in the music arena in as many months. RealNetworks (Nasdaq: RNWK) is making its services more compatible with Microsoft technology following a recent settlement that cleared the way for cooperation between the two companies.

Microsoft also sells music through its MSN Music store, but that site has gotten little traction to date.

Some observers see the Microsoft partnerships as less threatening to Apple than to the rest of the digital music industry. Yahoo (Nasdaq: YHOO), AOL, Napster and others are all targeting the same unclaimed market of non-iPod users.

Analysts believe that over time, Apple's early market lead will begin to erode as other options come online that offer lower prices and additional services, such as the ability to share song lists, content about artists, links to concert information and ticket sales , and other features.

Not Going Alone

Microsoft recently ended its own efforts to negotiate directly with record labels to expand the catalog of songs it offers for download.

Inside Digital Media analyst Phil Leigh said the talks likely broke down over pricing, with the labels wanting flexibility to charge more for certain songs and Microsoft recognizing the need to match or beat Apple's 99-cents-per-song price.

"The labels are pushing the subscription services approach," Leigh said, noting that MTV is already seen as a valuable partner because of the role it plays in exposing artists and music to its young audience.

The demographic angle is important as well. While younger consumers are mad about the Xbox, most of Microsoft's other products have traditionally been viewed as staid and buttoned-down, especially compared to the slick designs from Apple.

Microsoft actually debuted the Xbox 360 on MTV earlier this year, a move that has helped make the game console one of the hottest and hardest-to-find tech items this holiday season.