It’s hardly a secret that iTunes is under competitive fire in the digital music marketplace. There are plenty of challengers, including such heavyweights as Amazon, Microsoft and Walmart, but none has made a sizable dent to date.

Now Sony is stepping up to the table with its recently announced music streaming service, dubbed Music Unlimited powered by Qriocity, which will roll out by the end of the first quarter. And rather than taking a page from the other players (launching a store to support a new product or in the hopes that music fans will find it), the company is relying on its existing (and widespread) product line to drive sales and adoption.

Instead of focusing initially on portable players, Sony will push Qriocity Music to the living room: Any connected HDTV, Blu-ray player or PlayStation 3 will have access to the service (along with PCs and Macs).

Instead of the download-to-own model of iTunes, Qriocity Music will act as a streaming service, a la Pandora, Slacker or Last.fm. Basic users will have access to the service’s 6 million song catalog, while paying users will be able to assemble play-lists and access songs/albums on demand. In either case, the system studies user habits to make more intelligent suggestions.

Garden growth

“There (are) a lot of music places that are similar,” says Tim Schaaff, president of Sony Network Entertainment. “Our intention is we’re going to differentiate on a number of different fronts. One, we’re going to be bringing this music service to a lot of different countries. And two, we’re going to be able to offer this music service across a broad range of Sony devices.”

In the long term, of course, Sony knows the closed-garden approach will begin to work against it. It plans to open Qriocity Music up to a much larger variety of platforms in the future.

“It’s true we’re focused right now on enabling a lot of the Sony devices,” says Schaaff, a former top lieutenant of Apple CEO Steve Jobs who joined the conglom in 2005. “That’s natural. But it’s very reasonable to expect that over time, we will make the service available wherever it needs to be available.”

Market saturation?

The digital music business generates annual sales of $4.6 billion, according to the IFPI (the Intl. Federation of the Phonographic Industry). Last year saw a revenue increase of 6% — and the digital music market overall has increased more than 1,000% since 2004. All totaled, consumers bought 1.17 billion tracks and 86.3 million digital albums in 2010, says Nielsen Soundscan. And while those numbers (and the media spotlight) might lead some to believe it’s approaching saturation, the market still has a lot of growth potential.

Digital sales make up just 40% of the overall music market, according to the NPD Group. And just 16.5% of Internet users in the U.S. currently purchase their music digitally. On the other hand, evidence of saturation may lie in the fact that iTunes downloads registered almost zero growth from 2009-10, following a 12% increase the year before that.

Sony, of course, isn’t the first company to rely on the cloud for streaming music. Apple itself is rumored to be planning a cloud-based version of iTunes, which would also include social networking features that tie in with Facebook and Twitter.

And even if that doesn’t happen, iTunes is hardly a service one should underestimate. When Apple finally secured rights to songs and albums by the Beatles, some people rolled their eyes, noting that it had been easy for fans to rip the songs from their CDs for many years. Such naysayers were quickly silenced, however, when Apple sold 450,000 Beatles albums and 2 million individual songs by the Fab Four in just one week.

“Apple has certainly demonstrated that people are willing to spend money on media if you make it easy to get at,” acknowledges Schaaff.

Looming above all of this is the possibility that Google could be gearing up to jump into the digital music space as well. Last May, at the Google I/O developer conference, the search giant showed off Google Music, a prototype Web-based music service that was part iTunes and part cloud-based. Users will reportedly have the choice of downloading content to their mobile device or putting it in a “locker” in the cloud — which could be accessed from a variety of devices.

It’s very similar to the model Sony’s using — but it does have one thing working against it: Google itself.

As the company has shown with Google TV, its relationship (and reputation) with content providers is less than stellar. And some of its rumored propositions, such as letting users play every song on the service once in its entirety for free, aren’t likely to go over well.

Meanwhile, looming in the background are European subscription streaming services such as Spotify, which has more than 750,000 paying subscribers, and Vodafone Music, which has more than 600,000 customers across eight markets in Europe.

An uphill battle

Still, given Apple’s dominance in the music category these days, any service that’s targeting iTunes faces an uphill battle. ITunes presently owns 70% of the digital field, with Amazon a distant second, according to NPD. (Services like Microsoft’s Zune, Napster and Rhapsody barely blip the radar.)

Those are intimidating numbers, but the real threat of Apple lies in its legacy users. Songs on iTunes no longer have digital rights management, but they did for the service’s first six years — meaning older customers are unlikely to shift their music library to other devices or services since it would mean having to repurchase a substantial portion of their catalog.

As a result, making a significant dent in Apple’s market dominance will be tough, even for a company as diverse as Sony.

Schaaff, though, says he’s not intimidated.

“I remember from my previous life at Apple these tremendous fights about Microsoft, which was this giant monolith that nobody thought was ever going to go away or weaken,” he says. “But things don’t work like that.”

Global top 10 digital singles

Artist, Title, Sales (millions)

1. Ke$ha, ‘Tik Tok,’ 12.8

2. Lady Gaga, ‘Bad Romance,’ 9.7

3. Eminem feat. Rihanna, ‘Love the Way You Lie,’ 9.3

4. Lady Gaga feat. Beyonce, ‘Telephone,’ 7.4

5. Usher feat. Will.i.am, ‘OMG,’ 6.9

6. Katy Perry, ‘California Gurls,’ 6.7

7. Train, ‘Hey, Soul Sister,’ 6.6

8. Justin Bieber, ‘Baby,’ 6.4

9. Black Eyed Peas, ‘I Gotta Feeling,’ 6.1

10. Paramore, ‘Crushcrushcrush,’ 6.1

(Source: IFPI)