iTunes @ 10

On Sunday 28th April Apple’s iTunes Store will celebrate its 10th birthday.  It is arguably the single most important milestone in the digital music market to date.  In these days of cloud and streaming dominated industry discourse it easy to forget just how important Apple has been in the history of digital music and how equally important it remains today.  In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around  55% of all digital trade income and close to a fifth of all global recorded music trade revenue.  By comparison Spotify was closer to 10% of digital trade revenues and 4% of all global trade revenue.  Spotify is clearly at a much earlier stage of growth and represents the future, but iTunes is far, far from being a historical footnote.

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

  • Baby Steps: On January 9th 2001 Apple launched its iTunes music management software, and later that year in November came the first ever iPod.  Back then there was no iTunes Store and Apple made it very clear how they expected their customers to acquire digital music with their ad campaign slogan: ‘Rip Mix Burn’.  Revolutionary as it was though, the iPod got off to a modest start: despite multiple product updates, by the end of 2002 Apple had still only shifted 600,000 iPods. iTunes wasn’t changing the world, not yet.
  • Changing the Tune: In April 2003 Apple launched the iTunes Music Store in the US, and then in 2004 in the UK, Germany, France and Canada, as well as an EU Store.  There were plenty of download stores already of course – Apple is always an early follower not a first mover – but they were crippled by restrictive DRM, cumbersome technology and lack of interoperability.  Most stores didn’t even allow buyers to transfer to MP3 players or burn to CD. And if you were lucky enough to be allowed to transfer to an MP3 player, your device probably didn’t even support the store’s DRM it probably also relied on incompatible 3rd party music management software.  Apple changed all of that in an instant, delivering an end-to-end integrated experience.  Steve Jobs, through a combination of sheer force of personality and a commitment to spend big on marketing (really big) managed to persuade the big labels to support unlimited iPods, CD burning and multiple PCs.  Digital music hadn’t so much been stuck in the starting blocks as having its feet nailed to them.  Jobs set digital music free.  By July 2004 the iTunes Music Store had hit 100 million downloads, but more significantly by the end of 2005 Apple had sold 42.2 million iPods. iTunes was now selling iPods, and fast.
  • Beyond Music: When Apple was in the business of selling monochrome screen iPods, music was the killer app and iTunes was the marketing tool. But that changed on June 29 2007 with the launch of the iPhone.  Apple soon needed more than music to market its multimedia, touch screen, accelerometer enabled devices. Movies were proving difficult to license and TV shows faced free competition from Hulu, iPlayer, ABC.com et al. The solution of course was the App Store.  The App Store took just 3 months to hit 100 million downloads – it had taken the iTunes Music Store 15 months to hit the same milestone.  Apple remained, and remains, firmly committed to music but its attention is inherently diluted by all of the other content types that iPhones and iPads cater for.  When Apple launches a new device it is EA Games you see demonstrating a new game to showcase the device’s capabilities, not a new music track.  (And of course the word ‘music’ got dropped from the iTunes Store name long ago.)
  • The Platform Challenge: The App Store turned the iTunes Store into a platform, albeit it a highly controlled one.  This created an unprecedented window of opportunity for competing digital music services, suddenly they could break into the previously impenetrable iTunes ecosystem.  Pandora was an early mover and within a year of launching its iPhone app had acquired 6 million iPhone users, 60% of its then 10 million active users.  Shazam was another beneficiary, with the iPhone app finally giving Shazam relevancy and context it had long lacked.  And now of course we have Spotify, Deezer, Rhapsody, Rdio et al all hugely dependent on the iPhone, using it as the central reason subscribers pay 9.99.

Responding to Streaming

Strong iPhone and iPad Sales Have Reinvigorated iTunes Music Sales

Many commentators suggest Apple is being left behind in the streaming era.  It echoes comments that Apple was getting left behind by the social age, and its responses then (Ping! and Genius) are not the most compelling of evidence for Apple jumping on the latest digital music bandwagon.  Apple will of course have to eventually move towards a more consumption and access based model but it will wait, as it always does, until streaming and is ready for primetime.  (A radio service is a logical interim step). Spotify’s 6 million paying subscribers are impressive but pale compared to Apple’s 450 million credit card linked iTunes account.  And besides, iTunes is enjoying its most successful period ever (see figure).  For all the need of interactive multimedia products to market iPhones and iPads, music remains one of the key use cases and the iTunes Store has seen an unprecedented surge in music downloads as millions of new music fans enter the iTunes ecosystem as iPad and iPhone buyers.

Apple Still Underpins the Growth of the Digital Music Market

Interestingly Apple’s music download growth appears to be strongly outpacing the overall digital music market (see figure).  According to the IFPI total global digital trade revenue grew by 8% in 2012 but Apple’s iTunes downloads grew by about 50% during the same period, culminating in 25 billion cumulative downloads in Q4 2012.  Multiple factors are at play: iTunes has rolled out to new territories and a portion of the downloads will also be free.  Nonetheless, iTunes remains the beating heart of digital music.

The Next Chapter

Apple’s next big digital music move will have major strategic ramifications that will go far beyond the iTunes Store.  Currently Apple’s device pricing model is driven by storage capacity.  And of course in a streaming age consumers will store less and less content on their devices, so the ability to charge a premium for extra storage capacity will diminish.  This is a key reason why Apple has to go slow with the cloud.  Music however also presents an opportunity to safeguard price premiums.  Apple has shied away from subscriptions (Steve Jobs famously baited then-Rhapsody owner Rob Glaser that subscriptions were mere rentals) but device-bundled-subscriptions are now an opportunity that Apple simply has to take seriously.  Instead of charging a monthly fee for subscriptions Apple could create ‘iTunes-Unlimited’ editions’ of iPads and iPhones that would include ‘device lifetime’ access to either unlimited music streams or a monthly allowance of iTunes credits (for use on all forms of iTunes content).  The latter probably sits most comfortably with Apple as it presents the opportunity for tiers of access (e.g. $5 of monthly iTunes credit, $10 of monthly credit etc.) and so would enable Apple to support multiple product price tiers.

Whatever Apple decides to do with iTunes in the next 10 years, it will remain a key player and do not bet against it still being the preeminent force a decade from now.

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10 thoughts on “iTunes @ 10

  1. Probably one of the most significant effects of iTunes is that it has shown how paid-for can compete with free. Despite the fact that there’s nothing on iTunes that you can’t also get for nothing via P2P filesharing, it still manages to sell music by the bucketload. People are, it seems, perfectly happy to pay for music provided they can get it conveniently and easily in a format which suits them. And that’s where iTunes gets it absolutely spot on. It’s as simple as clicking a button on a website or mobile device, and there’s no DRM to get in the way of playing the music wherever you want it and whenever you want it.

    Contrary to what has previously been received wisdom in the music industry, the primary drivers of piracy are not financial. Piracy is driven primarily by a desire to get music in a format that’s convenient to the consumer rather than the supplier. DRM-locked downloads in multifarious proprietary formats were, in retrospect, always going to be a blind alley. But it’s taken a computer company, Apple, to demonstrate that to the music industry.

  2. Hi Mark, iTunes numbers are always confusing and difficult to tell how much of the sales came from music vs apps vs video. Can you provide your source of your comment? I’d like to share it myself and someone is going to ask me the same question.

    thank you! Cookie Marenco *

    In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around 55% of all digital trade income and close to a fifth of all global recorded music trade revenue. * * * * *

  3. Cookie – the numbers are iTunes songs only so do not include apps, video or games. I arrived at the 55% by doing the following:
    Creating quarterly download rates from the milestones they reported
    Applied a discount for free downloads
    Created an average retail price per download (modelled from album / single splits etc.)
    Created the wholesale label license fee rate per download
    Multiplied the wholesale rate by total paid downloads
    Calculated that as a % of the total trade digital income reported by the IFPI.

    I cam share the excel workings by email if you want them

  4. Mark – totally agree on the importance of convenience. Convenience is king. It’s the reason why in app purchases are becoming so successful too and (IMO) are a vastly under-utilized asset by the music biz.

  5. I want to know why Apple’s distribution fee is so high?
    Physical distributors need real warehouses, real sales staff, there is real breakage and loss of product, shipping costs and worst of all returns. They also pay for manufacturing. Yet, their rates ranged from 16% – 25% if they gave you a six figure advance. Please explain. I would like to know what Apple’s expenses are. I was told once that Apple has few employees, and they do not really promote music. Their volume is enormous… What justifies Apple taking 30%?

  6. The 30% rate that Apple charges is for Apps not for music. For music the rights owners charge a per track fee and then Apple sets a retail price based upon that

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  8. Pingback: The iTunes Decade As Celebrated By Apple, Mike Doughty & Industry Analysts Alike

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