Why the Music Industry Needs Another iPod Moment

The importance of Apple to the digital music market cannot be overstated.  Without Apple the digital market would be vastly smaller than it is now.  With all of the talk of streaming services and the shift to the consumption era it is easy to think of Apple’s iTunes Store as yesterday’s game.  Such an assumption is as dangerous as looking upon the CD as an irrelevance in the present era.  The CD and iTunes combined account for approximately 78% of total recorded music revenue in the world’s 10 largest music markets.   And yet neither look like they are going to provide the momentum the music industry needs over the next few years.  Despite its vast importance to music revenue today, the CD is obviously on a fixed downward path.  And the download is not so dramatically different in profile in that it is the dominate revenue source yet is not delivering the dynamic growth the digital market needs.  Key to this is of course the role of Apple.

Apple CEO Tim Cook told us at the launch of the iPhone 5 that ‘Apple still loves music’ and so it does.  But music is inherently less central to Apple’s content and device strategy than it was 5 years ago.  When the iPod launched it had a monochrome screen and did little else than play audio.  Music was the killer app with which to market iPods.  Now games, apps, video and books show off the capabilities of colour touch screen iPads and iPhones much better than a static audio file (even if music remains one of the key activities on both those devices).    In the early days of the iPod Apple needed the record labels more than they did Apple.  Indeed, to begin with the iPod was far from a runaway success.  By the end of 2002, one year after launch, the iPod had only sold 625,000 units.  The iTunes Music Store changed the story, delivering not only unprecedented digital music milestones, but also record iPod sales. After the first full year of the iTunes Music Store, sales of the iPod had quintupled from 2 million to 10 million, and one year later they surpassed 40 million. The iPod and the iTunes Music Store had a clear symbiotic relationship.  Now though, Apple’s devices benefit from a much broader array of content and services from the iTunes Store, which pointedly is no longer called the iTunes MUSIC Store.

Apple’s diversification of device and content strategy heralded a brave new chapter in Apple’s history but it has also left the digital music market without the fiercely energized catalyst that kicked it into motion.  By the time Apple launched the iPhone in 2007, the installed base of iPods was already slowing.  Though sales were still increasing, the majority of those were either replacement or additional purchases.  So although iPod sales were booming still, the number of new iTunes Music Store customers was not.  Throughout 2008 I presented the data to a number of senior record label executives at the time and I argued that they needed to start planning for a post-iPod slow down.  Some of them didn’t take me too seriously, and who could blame them, after all iPod sales were growing strongly and iTunes downloads were growing at a stellar rate. But now, with a few years of market data behind us, the true scale of the post-iPod slowdown is clear (see figure).  As soon as iPod sales slowed, so did the digital music market.  Prior to 2008 the digital music market had grown by an average annual rate of 85.2%, after 2008 that rate dropped to 7.5%.  In many markets the 2009 slowdown was of falling-off-a-cliff proportions: in the US digital growth slipped from 30% in 2008 to a near flat-lining 1% in 2009.

Streaming services have started to bring some welcome momentum to digital music.  But much more is needed from them if growth is to be reinvigorated.  That growth may also be helped by new music formats like the forthcoming Lady Gaga album app.  Whatever the source of it, it is clear that the music needs another iPod momentum to kick the digital market back into life.

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18 thoughts on “Why the Music Industry Needs Another iPod Moment

  1. Pingback: Daily Report #55: le crédit d’impôt, le FAIR 2013, Radiohead et YouTube… | DBTH – L'Agence

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  3. Could this slow down be explained with the incursion of Spotify and people moving from Itunes to cloud based services? At least in the Uk and Europe where Spotify has been present for a few years now.
    I personally see more value in buying an app from the itunes store than buying a song, I can have all the music I want with my premium Spotify account on the iphone and at home, record labels should work more closely with the streaming services and develop more cloud based content as it seems this is the way is heading, apart from a minority who prefers to own and collect records and cds, but music its having its Spotify post itunes moment.

  4. Apple ushered in a renewed marriage between music and technology with it’s iPod, and made billions cashing in on their market dominance notwithstanding unsuccessful attempts from other manufacturers to provide a comparable product. From the days of Edison’s gramaphone to today’s mobile platforms nothing underscores the historically symbiotic relationship between music and technology more. However, history also concludes that the technology format can be a long fall off a short cliff (remember beta vs vhs, or laser disc players). Not that Apple’s products will be shortlived however, the lightening fast change of the music market and consumer expectations that come with it create a demand that Apple may not be able to sustain long term, remain competitive or lead. I agree that there is needed a new iPod moment to spur momentum however, that momentum will probably be ushered in by a radical or less subtle shift in technology that incorporates multiple aspects of one’s life and less the singular approach of listening or viewing choices. I think Apple is correct in pursuing a comprehensive strategy that diversifies its product offerings i.e. apps, movies, music, games, business to set the pace rather than be outpaced from which there may be no recovery.

  5. Juan – the impact of the newer streaming services (Spotify, Deezer, Wimp etc) is the small upturn in the curve that you can see from 2010. Those services are (currently) predominately bringing extra revenue to the marketplace rather than cannibalizing downloads. Though that may happen over time.

    Franklin – Apple’s device and content strategy is entirely right and appropriate for Apple, it just has the unfortunate effect of being less impactful for the music industry. I agree that the most likely form the next ‘iPod moment’ will take will be something less dramatic, something more evolutionary. And of course there is already more of an established market.

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  7. Hi Mark, here’s my 2 cents worth. It can be seen from the infographic that the decline in iPod sales is almost in-line with the rise of the Smartphone. Not only did iPhone (offering similar and more functionality) sales start sky rocketing at this point, other players developing with the Android system started to come to market which may have deterred people from buying apple products . I don’t have the figures at hand, but I’m sure this probably has something to do with it as well. With regards to the digital music sales slowly decreasing, throughout the period of the early 2000s, many people may have started buying up music they already owned on other analogue and digital formats, from iTunes for their new iPods. This is quite a common consumer activity when media formats transform and develop. This in addition to other ways to access digital music (streaming etc.) may be effecting the growth. Also, one major factor to consider is the recession. This is quite often omitted from these types of studies and has a very profound effect on consumer habits. no one I know currently buys as much music as they used to for this reason.

    Cheers,

    Adam.

  8. Pingback: Why the Music Industry Needs Another iPod Moment | That Eric Alper

  9. I can’t argue with your analysis of “what happened” (digital sales slowed after iPod sales peaked), but I disagree with your case for “what happens next” (the industry needs “another iPod-like momentum boost”). The industry needs a LOT of things, but most of them are changes that must come from within the industry itself – re-setting expectations, getting smarter & more efficient, figuring out how to add value to their products & leverage their artists’ audiences more effectively. Furthermore, the industry needs to stop waiting for a “savior” from the outside to give them a boost through some magical technological innovation.

    The idea that Apple “saved the industry” by launching iTunes and the iPod is short-sighted thinking. The industry faced a huge problem in digital, and they were clueless & panicky about how to deal with it. Apple came along with an attractive new model, so the industry passed the buck to Steve Jobs and said “Here, you fix this for us”. In return, the industry gave away two key pieces of leverage – bundling and pricing – and in no time, iTunes’ dominance re-set the market’s expectations so that all tracks would be a la carte, and nothing would cost more than 99c (or $9.99). And despite the fact that iTunes helped “shrink the pie” of the retail music market, the industry STILL let them take a HUGE slice of what was left – 30% of each sale. Basically, the industry gave away all their power & leverage so they wouldn’t have to do the hard work of innovation or even the lengthy-but-essential work of real negotiation. Apple took this opportunity to pick up massive momentum & market share, which they’ve used to catapult themselves to the front of the smartphone & tablet markets (leaving poor little music as an afterthought, a tiny sliver of their overall business). And now the industry is doing the same thing with Spotify – an outsider seems to have magically solved the puzzle of streaming, so the major labels are giving away all their leverage without negotiating fair compensation.

    Here’s what needs to change: the major music companies need to flush out all the old “heads” who still operate under the influence of the “old model” and replace them with smarter, younger people who understand the new media business, who practice real innovation, and who know how to work WITH tech companies instead of just handing control over to them. The major labels have been shrinking, consolidating, weakening and dying for over ten years, looking for boosts of momentum from the outside without making any real positive transformative changes from the inside. There’s your problem.

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  11. Pingback: Why the Music Industry Needs Another iPod Moment « Official MXP4 Blog

  12. Adam – I wouldn’t count Android as a key factor. There is very little music spending thus far associated with the Android platform. As for the recession, yes it plays a role but not a major one.

    People are not spending less money on music because they can no longer afford it, quite the contrary. In the US total consumer expenditure on entertainment rose by 89% between 1990 and 2009. In fact it is not even that people are not spending money on music either: global live music and music merchandise revenues grew by 358% between 1990 and 2012. People are spending less money on recorded music because they can do so without impacting their ability to get music and they are spending the money they save on other media and lifestyle expenditure choices.

  13. Jason – I agree completely that Apple came along at the right time with the right solution. But the labels did not pass the buck. Jobs had to fight really hard to get iTunes licensed. Prior to then there was no music service with DRM that permitted unlimited MP3 players and also CD burning support. Initially the only way he got the deals was by saying he’d beta test it on the Mac platform. As soon as the labels saw how well the test went they licensed more widely. Also the c.30% Apple gets still leaves more label margin than for a high street CD sale.

    With regards to where the innovation should come from, I agree that there is a major onus of responsibility among labels to set the agenda, or at least to drive it. However labels do not have innovation heritage or resources to drive technological innovation. Labels have done a vast amount to bring in new thinking,. They already have done much of the bringing in new people with new approaches. But ultimately they rely / depend upon their channel partners. They need Apple, Android and Amazon to a) be on board and b) to actively support any change. Getting all three behind something which will inherently mean costs and resource is no easy sell.

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  15. Music without Apple i-pod is a myth for today’s generation.More or less every people carries an i-pod with him/her while traveling. One of the factors of increase in the craze for music is just because i-pods.

  16. Very well written article. I agree with you that the Ipod did help the music industry.. Being a hip hop artist myself, I have a upfront seat on the roller coaster that is the financial success of the industry.. It is my opinion though that big company like Sony, if they truly wanted to could easily combat the issue of piracy. When all the bootlegging was going on people still burn them to disc or mp3 player, which Sony is a huge manufacturer of. More piracy meant an increase in the sale of Cd burners, blank disc, and portable player (mp3), they one on both ends. It was the artist that saw a huge drop in revenue, the artist always get the bad end of the stick..

    Great post!!

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