iTunes @ 10

On Sunday 28^th April Apple’s iTunes Store will celebrate its 10^th 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 9^th 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 3^rd 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

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.

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.

Apple Hits 25 Billion Downloads: What it Means for the Music Industry

Yesterday Apple announced that it had reached the milestone of 25 billion songs sold.*  The number is impressive by any means and brings yet more important context to the current scale of streaming versus downloading.   But of course music downloads are just one part of Apple’s business, and not a hugely important one at that.  Apple sells downloads to improve its device proposition.  As I have written before, it is effectively monetized CRM, and interestingly in these days of increased investor scrutiny, music sales are actually a low margin revenue stream for a company which prides itself on high margins.  Which means the better that music sales do, the more they dent Apple’s profit margins.

But the really interesting trend that the 25 billion downloads reveals is that the surge in iPhone and iPad sales has brought a very significant boost to iTunes sales (see figure).  This has major implications for the music industry.  In 2008 digital music sales fell off a cliff when iPod sales started their long term decline (see my previous chart here).  But now, following an inter-product cycle lull, music sales are up again. The impact of Apple’s device sales on music sales is huge.  When declining iPod sales started pulling digital downloads growth down I wrote that ‘when Apple sneezes the music industry gets a cold’.  Now it is also clear that when Apple smiles, the music industry grins from ear to ear.

There are other factors at play too (such as the impact of all those new Apple stores coming on stream in markets such as Russia and India).  But the data does show that we are some way yet from streaming denting download sales. Largely because downloads are a much more natural entry point for new digital music consumers.

For some final context though, as significant as the surge in iPhone and iPad sales has been on music sales, it has had an even more marked impact on App downloads.  Which is a timely reminder that these devices are built for multimedia, interactive, visual experiences.  While the music industry’s main product for iPhones and iPads remains a static audio file.  That problem needs fixing fast.

 

*For long term Apple watchers the use of the word ‘sold’ is significant. The language Apple usually uses is that in the opening paragraph of the release ‘bought and download’ which has long been assumed to be worded to capture free downloads also.  The interesting question now is whether the use of the word ‘sold’ in the release headline is a clarification of terms, or an over eager copy editor.

Why Google Needs to ‘Do an Apple With Motorola’ to Make Play a Success

2012 has been a fantastic year for smartphones, with penetration pushing past the 50% mark in key markets such as the UK and US (some estimates even put US penetration as high as 70%).  Apple’s iPhone is the leading smartphone in most key markets but Google’s Android Operating System (OS) has much larger market share: c. 70% compared to c. 20% for iOS (Gartner estimated global market shares to be 64% and 19% respectively back in Q2 2012).  But these market share statistics can be misleading, particularly when it comes to understanding the digital content and services marketplaces.

Android Fragmentation Complicates Content Strategy

The fragmented nature of the Android landscape is well documented but close analysis of key metrics reveals some startling trends with significant implications for content providers (see figure):

• 60% of iOS devices are on the latest version of the OS (iOS 6) compared to just 3% of Android devices on the latest flavour of Android (Jellybean). Additionally, 88% of iOS devices are concentrated in 3 versions of iOS while Android devices are spread across 10 different versions of the OS, of which 54% are on a version that is 4 releases out of date (Gingerbread).
• There are 260 different Android phone and tablet models, compared to just 6 iOS tablet and phone models.
• There are more than 50 different official Android stores, but just one Apple App Store

Of course there are many mitigating factors, but that simply does not matter from a consumer perspective nor indeed from a content owner’s perspective.  Both iOS and Android have got vast App catalogues (750k and 650k respectively) and both have vast numbers of apps downloaded (35 billion and 25 billion respectively).  Both also have huge installed bases of devices: 450 million iOS devices and 600 million Android devices.  But there is only one clear leader in paid content: Apple.

Looking just at music sales, Apple’s music annual music sales (based on the last reported 12 months) equate to approximately $4.00 per iOS device, compared to just 50 cents per Android device.  Apple wins in part because of its longer presence in market, but more importantly because it exercises complete control of the user journey in a closed ecosystem.

The Importance of Closed Ecosystems

The success stories of paid content to date are closed ecosystems: iTunes / iOS, Playstation, xBox, Kindle.  Though the controlled nature of these ecosystems may limit user freedom, they guarantee a quality of user experience.  In these post-scarcity days of content, the quality of experience becomes a scarce experience which people are willing to pay for.  Google simply cannot exercise that degree of control because of its pursuit of a less-closed (but not wholly open) ecosystem strategy.  It depends upon device manufacturers to determine the user experience and also gives other value chain members much more control, such as allowing operators (Vodafone) and retailers (Amazon) to open their own Android stores, as well as, of course handset manufacturers (Sony).

Smartphones with Dumb Users

In a pure mobile handset analysis this doesn’t matter too much.  But from a content strategy perspective it matters massively so.    The problem is compounded by the fact that that as smartphones go mainstream the user base sophistication dilutes.   With so many consumers increasingly buying smartphones because they are cheap and on a good tariff, rather than for their smartphone functionality we are ending up with a scenario of smartphones with dumb users.  (I am indebted to my former Jupiter colleague Ian Fogg for this phrase). This factor arguably affects Android devices more than it does Apple devices because a) they are more mainstream b) they are often cheaper.  This matters for content owners because the more engaged, more tech savvy smartphone owners are also the ones most likely to pay for content.

Google Needs to ‘Do An Apple’ and Not ‘A Microsoft’

With growth slowing in the digital music space, it is clear that new momentum is needed.  Google is potentially the strongest opportunity to bring mass market traction to the digital music space, but currently its music strategy, and paid content strategy in general, is falling short due to all of the reasons outlined above.

Google does however have an incredibly strong set of assets at its disposal, in terms of installed based and growing adoption.  If Google is serious about making its Play strategy a success then it needs to start putting itself first.  Back in the early 2000’s Microsoft expected to be the dominant force in digital music because Windows Media Player was the #1 music player and Windows DRM was the industry standard rights protection.  But instead of pushing ahead with a bold Microsoft music offering it relied upon its hardware and services partners to do it for them.  Just as Google now is sensitive to the concerns of its commercial partners, so Microsoft was then.  Of course Microsoft lost the battle and their softly-softly approach was powerless to fight off the rapid onslaught of iTunes.   Microsoft eventually realized that it needed to go it alone, launching Zune, but it was too little, too late.  Interestingly there wasn’t much of a backlash from commercial partners when it did so. Launching a standalone music strategy was actually compatible with being a platform partner.

Now Google has an opportunity to learn from both Microsoft’s mistakes and Apple’s success by turning its recently acquired asset Motorola into a closed Play ecosystem to rival iTunes.  This doesn’t preclude Android partners from continuing to build their own devices and app stores, but it does create a paid content beachhead for Google, from which it can build a base of highly engaged digital consumers who will quickly learn to value the benefits of a high quality, unified content and device experience.  In a Motorola ecosystem Google can truly allow Google+ and Play to become the glue that binds together its diverse set of valuable assets.  Without it though, Play will continue to struggle for relevance in a fragmented and confusing Android user journey.

How the App Economy Has Transformed Product Strategy

Mobile apps can stake a pretty solid claim to being the single most important shift in consumer product behaviour in the last 5 years.  Sure the devices themselves are pivotally important, but were it not for the apps consumers install on them, they would just be better versions of the feature phones and early smartphones from half a decade earlier.  Apps have transformed consumers’ expectations of what digital experiences should be, and not just on connected devices.  But Apps have also transformed product strategy, in two key ways:

• Apps have replaced product strategy with feature strategy
• Apps have created a renaissance in the consumer software market

Apps have replaced product strategy with feature strategy

Though there are a good number of apps which can be genuinely held up as fully fledged products (Google Maps, Angry Birds, WhatsApp etc.) many are in fact product features rather than products.  Shazam for example is a fantastic feature, so fantastic that it should be as ubiquitous in music products as a volume button, but it is nonetheless a feature not a product.  Don’t mistake this for a derogatory critique: indeed feature strategy is virtually the core DNA of the app model.  After all apps rely upon the core product of the smartphone or tablet itself to do much of the hard work.

Apps co-exist with the core functionality of the device in order to layer extra features on top.  Instagram uses a phone’s camera and web functionality, Layar uses the camera and GPS and so forth.  In short, apps add features and functionality to hardware products.  That does not make them inherently any less valuable for doing so, but it does make them dramatically different from pre-App products. Even the majority of utility apps, such as those that track rail and flight schedules, or the weather are at heart browser bookmarks on steroids.  Games are perhaps the only app category which in the main can be considered as self-contained products.

This shift from product strategy to feature strategy has slashed the time it takes for products to get to market and has dramatically reduced development overhead, but it is a model riven with risk.  Consumers and the device ecosystem companies are winners, but many app developers are exposed.  On the one hand they have the insecurity associated with platform dependency, on the other they know that if their features are that good that they will likely be integrated into the device’s core OS or into the featureset of another app with broader functionality.  Sometimes those scenarios will be achieved via favourable commercial avenues (such as an acquisition or licensing) but sometimes it will just be flat out plagiarism.

The lesson for app developers is clear: if your app is a feature and it is good, then you need to plan for how to turn it into a product, else plan for what to do when your app has become someone else’s feature.

Apps have created a renaissance in the consumer software market

It is sometimes easy to lose sight of just what apps are: software.  In the PC age software was for most people one of three things:

• Microsoft Windows and Office
• An anti-virus tool
• A bunch of free-trial bloatware shortcuts preinstalled on their desk top pre point of sale

Mainstream PC behaviour was defined by Microsoft functionality and browser based activity.  Sure, software from the likes of Real Networks and Adobe supported much of those browser based experiences, but they were to the consumer effectively extensions of the core OS rather than software products themselves.  A premium consumer software market did exist but never broke through to mainstream.  Consumers didn’t know where to look for software, whether it would install properly, whether it would work on their PC, and then on top of all this they were faced with having to provide credit card details to small companies they knew nothing about.

Mobile apps changed all of that.  App stores simultaneously fixed the discovery, billing, installation and compatibility issues in one fair swoop.  Apps have enabled the consumer software market to finally reach its true opportunity.  Just in the same way that the iPod allowed digital music to fulfil its potential.

Apps continue to transform consumer behaviour and expectations

So where will feature strategy and the reinvigorated consumer software business take us?  What is clear is that consumers are getting exposed to a wider array of digital experiences and are evolving more sophisticated digital behaviours due to apps.  Apps are also enabling consumers to do things more effectively and efficiently, and are empowering them with more information to make better decisions, whether that be getting the best flight price or choosing the best local plumber.  They are also making consumers expect a lot more from a device’s ecosystem than just the devices.  How often do you see a phone company advertise its handsets with the screen turned off? It is the apps that count.  For now, however good Nokia might be able to make its smartphones it knows that its app catalogue and ecosystem struggles to hold a candle to Apple’s App store and ecosystem (the same of course applies to all other handset manufacturers).

Apps have become velvet handcuffs for connected device owners

But what happens if/when consumers start to shift at scale between ecosystems?  For example, say Apple finds swathes of its iPhone and iPad customers switching to competitors in the future, what sort of backlash will occur when consumers find they have to expensively reassemble their app collections to reconstruct the features they grew used to on their Apple devices?  Perhaps a smart handset manufacturer would consider investing in an app amnesty, giving new customers the equivalents of their iOS apps for free on their new handsets.

For now though, Apple’s market leading app catalogue behaves like velvet handcuffs on its customers and gives it a product strategy grace period, in which it could get away with having a sub-par product generation, with customers staying loyal because of not wanting to lose their App collections.  But not even the strength of Apple’s app catalogue would not enable them to keep hold of disaffected customers much longer than that.  After all, apps are features, not the product itself.

Spotify Play Button: Digital Music’ Largest Marketing Funnel Just Got Bigger

A quick one….

Spotify today announced its new ‘Spotify Play Button’ feature.  As Giga Om Pro’s David Card Tweeted, it is ‘Spotify’s 1st baby step towards 2-way platform syndication’.  In a nutshell the feature enables publishers to post embedded song stream links on their sites, thus adding music context to their stories.  Publishers at launch include Vogue, GQ, The Guardian and NME.  Crucially the Play Button is not an audio embed but instead a link that will play music from Spotify’s servers, via a user’s Spotify app via the site.  Which means that if you don’t have Spotify you don’t get to listen to the music.

10 Million Users Translates to a Small Share of a Publisher’s Readership

As much as a success story as Spotify is, its 10 million users (or 17.5 million depending on which source you choose) are significant in digital music terms but tiny in Internet user terms. Which matters a lot to mainstream publishers such as Vogue and GQ who appeal to broad demographics.  Only a small share of their readers will actually have Spotify accounts, so the majority of their readers will, as I told the BBC, encounter user experience ‘speed bumps’.  Readers will either not be able to listen to music or instead will have to register for Spotify…assuming of course that they are Facebook users, otherwise they will have to register for Facebook first, and then Spotify.

So non-music specialist publishers (i.e. those whose readers will not in the main have Spotify) will likely get as much reader push back as they will positive feedback.  For Spotify though it is all win-win.  This is a smart customer acquisition tool.  Combined with the Facebook integration Spotify now arguably has the largest marketing funnel of any digital music service (YouTube, and by extension Vevo, excepted).  And this is what it is all about, as the following quote from the Spotify press release attests:

Anyone new to Spotify will be set up with the Spotify desktop app, which powers the button in the background, as soon as they start playing the music.

Another Step in Spotify’s ‘Music API’ Strategy

As I’ve argued before, Spotify want to become the API for Music.  This is part of that strategy.  Soundcloud should probably be concerned – though they are more than smart enough to find out a way to make their universal accessibility a highly visible differentiation point.  YouTube and Vevo though won’t be losing sleep.  The majority of user generated music links will continue to be YouTube embeds, as will the majority of publisher music links.  The web is becoming an ever more video-rich experience and music is no exception.

So, a small but smart move from Spotify that will do wonders for their user acquisition and ‘Music API’ strategies.  The case for publishers though is less clear cut.

Facebook Timeline for Artists (When Platforms Forget Their Responsibilities)

Regular readers will know I’m a big advocate of content platforms and ecosystems.  Indeed device based ecosystems such as iTunes, Kindle and xBox are the success stories of paid content. More recently these platforms have been complemented by a new wave of ecosystems by the likes of Facebook and Spotify, that depend upon software and user data for walls instead of hardware.  Both sets of ecosystems depend upon 3^rd party developer and / publisher platforms for success.  A thriving platform is one which is defined as much by 3^rd parties as it is the host company.  But just as a blossoming garden requires careful tending so does an ecosystem.  The host has a responsibility to ensure that developers and publishers have the support, processes and transparency necessary to instill the confidence necessary for them to invest their time and resources into the platform.  It is a responsibility that does not always come cheaply to the hosts and isn’t always respected to the full, as we have seen with the impact of Facebook’s Timeline on a number of artist app developers.

Artist Timelines are Throttling Artist Apps

Facebook’s Timeline feature is looking like a great innovation from the social networking behemoth and there are many examples of artists, music services and music publications using the feature to great effect.  (Take a look at Spotify’s Facebook Timeline for a super cool implementation).  However the way in which Timeline was implemented on artist pages has had a dramatic cooling effect on what was beginning to shape up to be a vibrant community of Facebook artist app developers.  Latest data from AppData.com and reported on Digital Music News shows that Band Page (formerly Root Music), Reverb Nation and FanRX (formerly BandRX) all saw a steady decline in usage in the lead in to the Timeline switchover date and then a ‘falling off a cliff’ drop on the date itself.  All three apps have remained stuck at their decimated levels.

The key reason for the collapse in user numbers is that as part of the Timeline feature Facebook prevented these apps being able to act as the landing page for artist profiles.  There is very well thought out reasoning for this move: Facebook remembers only too well the anarchic chaos of MySpace artist pages, indeed the pared-down minimalism of Facebook’s UI was an intentional antidote to MySpace messiness.  But none of this detracts from the fact that Facebook has failed to fulfil its duties as platform host.  It should have done more to accommodate the concerns of artist app developers and would be well advised to work with them now to improve their lot.  Although it would be stretching credulity to claim these apps were responsible for artists switching from MySpace to Facebook, they certainly played an important role in easing the transition for many.

Being a Platform Means Looking Out for the Small Guys Too

If Facebook is serious about becoming a platform for music, it needs to ensure that it doesn’t just lay out the red carpet for Swedish streaming services.  The value of Facebook as a music platform will come from the functionality, utility and experience delivered by 3^rd party apps that help artists differentiate the way they engage with fans.  Apps such as Band Page, Reverb Nation, Fan RX and Bopler Games.  Ensuring that strategic priorities can be implemented without destroying the livelihoods of developers is a key responsibility of platform hosts.  Of course sometimes hosts patently ignore the responsibility and use app developers as free R&D – just think about the number of times Apple has killed off app companies by integrating their functionality directly into iOS.  But even Apple knows you can only do that so many times before you risk killing the proverbial golden goose.

I continue to maintain that Facebook’s platform strategy is subtly brilliant, and in the bigger scheme of things the artist app Timeline debacle is pretty small fry.  But if Facebook is to establish itself as a genuine music platform it must learn from the lessons Band Page et al are painfully teaching.