Telcos Dial Into Digital

As Canada braces itself for legal changes that could curtail peer-to-peer (P2P) downloading, the country's telecommunications companies are finding ways to position digital music services as a competitive advantage.

On Oct. 18, Heritage Minister Bev Oda told the Canadian Heritage Standing Committee that the Conservative government would introduce a proposal in parliament before the end of the year to make free downloading clearly illegal—and Canada's top companies in the consumer communications sector are preparing for a renewed push behind digital music once the copyright issues are resolved.

"The interest in digital music is certainly on the upswing [in Canada]," says Pat McLean, VP of consumer Internet services for Bell Canada, the country's largest telecommunications company. "But getting the value proposition to customers given the environment where people aren't concerned about the legal implications of piracy has been a challenge."

The main rivals for the emerging digital music market in Canada are Bell, Vancouver-based Telus and Toronto cable giant Rogers. All three companies are positioning themselves to offer a variety of music services to customers, especially given Canada's high rate of broadband penetration, which was pegged at 49% by Toronto-based Solutions Research Group versus 36% in the United States.

Progress for their new business models has been slow, however, as digital music downloading over P2P networks remains rife in Canada. According to a recent survey for the music industry by Toronto research firm Pollara, 1.4 billion songs were traded for free over P2P networks in Canada in 2005, with 17% of Canadians downloading music for free over the Internet.

The Canadian music industry has blamed piracy for its paltry digital music sales figures, which accounted for only $18 million in 2005 or 3% of the market's trade value, according to the IFPI. In contrast, digital music sales in the United States accounted for 9% of total trade value.

Earlier this year Bell Canada acquired a majority stake in Puretracks, a Canadian digital music business that competes with Apple Computer's iTunes. Puretracks CEO Alistair Mitchell says the acquisition of his company by Bell is simply the first step in a larger evolution as communications companies search for ways to deliver music to an audience increasingly plugged in to the Internet through computers and handheld devices.

Puretracks boasts 1 million tracks from Canada's major and independent label catalogs, retailing at 99 cents Canadian (87 cents) per track. So far, Bell has not altered Puretracks' business model, though it has cross-promoted the service to its 2.3 million consumer Internet customers and used its media properties to market the company.

Though neither Puretracks nor iTunes have disclosed Canadian sales or market share figures (Napster also operates in the country), iTunes is generally considered by industry executives to be the dominant player in the sector.

Rogers, which has 1.25 million broadband customers, has partnered with U.S. Internet giant Yahoo to provide them with a branded downloading service and other music offerings. Telus, which has 763,000 high-speed Internet customers, uses Puretracks technology to provide its customers with exclusive music offerings and downloads.

Warner Music Canada expects more consumers will embrace digital music, especially over mobile phones (which accounted for 29% of Canadian digital music sales in 2005, according to the IFPI). Charlie Millar, Warner Music Canada's manager of digital business development, says Rogers, Bell and Telus have a unique consumer offering.

"Canada's players can offer a three-screen approach—TV, wireless and Internet—that is pretty unusual in other parts of the world," Millar says. "That potentially means someone hears the new Sean Paul single, downloads the song using their cell phone and immediately it is transferred to their computer and digital set-top box."