After The Download: When Apple Turns Off The iTunes Store

 

When new formats race to the fore it is easy to make the mistake of taking an eye off the legacy formats. This is risky because they usually still account for very large portions of existing revenue. Now that the marketplace has finally accepted that streaming does in fact cannibalize download sales (indeed 27% of subscribers say they have stopped buying downloads) the attention has, understandably, simply shifted to figuring out how quickly streaming revenue will grow. At a macro level this is fine, in fact it even works at a big label and publisher level. But it is far more challenging for smaller labels and publishers, and also for artists and songwriters. Each of these constituencies still depends heavily on download sales. Of course the big labels and publishers do too, but their repertoire portfolios are so large that they can take the macro view. For the rest though, because the average royalty income per album per streaming user is just $0.21, download sales remain crucial to cash flow. So, what happens when the download dies?

The demise of legacy formats normally follows this pattern:

  1. An accelerated initial decline as early adopters abandon the technology in favour of the shiny new thing
  2. A steadier, slower, long term decline as the mainstream migrates away, leaving only the laggards
  3. A sudden death when the sales channel no longer supports the product (think black and white TVs, cassette decks, VHS recorders etc.)

The CD is clearly following this trend but phase 3 will be long in coming because it is so easy for Amazon to continue stocking product, especially super high end box sets etc. Meanwhile discount retailers, petrol stations, convenience stores etc. will continue to find space for super low end cheap catalogue CDs. For downloads though, there is likely to be a near-sudden halt within the next 5 years. Although Amazon has made solid inroads into the music download business, Apple remains by far the dominant player. Thus the music industry is in effect dependent on the strategic whims on one partner for one of its most important revenue streams.

Subscriptions Are Key To Apple’s Services Narrative

Apple has historically been in the music business for one reason, to help sell more devices. That’s why Steve Jobs was happy to accept a 65% label revenue share model that ensured it was nigh on impossible to run a digital music business as a profit making venture i.e. he wanted to lock the market into a commercial model that neutered the competitive marketplace. We’re still feeling the effects of that now, with that 65% benchmark being the reference point against which streaming rates have been set.

No new news there. But what is new, is that Apple is trying to pivot its business towards a services based model. Apple is building a Wall Street narrative around monetizing its existing user base. It needs that narrative because device sales are slowing. Until it gets another hit device that can grow another new-ish marketplace (VR anyone?) Apple needs to focus on driving extra revenue from its base of device users. This has much to do with why Apple chose to enter the streaming market now as did any other factor. While the download business generated solid headline revenue it did not have the benefit of being predictable, on going spend in the way that subscriptions are.

So music is now more important to Apple because it is the entry point for its services based business model. Eventually music will lose importance to video, and potentially games too if Apple can build a subscription business around that. But for now Apple will be looking to migrate as many of its iTunes customers as possible to subscriptions, whatever it might actually be saying to record labels!

download collapse

Turning Off The iTunes Store

And this is where the download collapse comes in. Last year downloads declined by 16% in nominal terms. This year they are tracking to decline by between 25% and 30%. If we trend that forwards there will only be a modest download business of around $600 million by 2019, down from a high of $3.9 billion in 2012. For Apple, if it continues to grow its subscription business at its current rate, hitting 20 million subscribers by end 2016 and around 28 by end 2017 etc, by 2020 its download business would be tracking to be 10 times smaller than streaming revenue but, crucially, streaming revenue would nearly have reached the 2012 iTunes Store download revenue peak. This is the point at which Apple would chose to turn off the iTunes Store. The narrative of services based music business would be complete.

Smaller labels, publishers, artists and songwriters all better have a Plan B in place before this transpires. The download was a fantastic transition product to give the music industry its first steps into the digital era. But as we transition from transactional models to consumption based ones, its role diminishes every passing year. It has served the market well, but the end is now in sight.

 

 

34 thoughts on “After The Download: When Apple Turns Off The iTunes Store

  1. All inclusive subscription streaming has a global income limit of $15B. (see Mark’s recent charts) Conclusion: Daniel Ek’s model is wrong and KILLS $200B of music goodwill obvious to non-industry stranger.
    Conversion of over 100,000 Radio stations to simple music stores could deliver $100B music business by2020! Why are we throwing all we have at CEMENT WALL?

  2. Wouldn’t that be a bit risky for Apple? I think most downloaders would just move to another download store rather than sign up for a subscription. I don’t think downloads will crash to low levels of some other dead formats. There’s a lot of people out there who would never consider spending $10 a month on music, and are happy just to download the odd Katy Perry single or Adele album when they fancy. Some people don’t need or want access to whole Apple catalogue.

  3. Ben – agree totally about the casual fan but a) within 5 years we will have lower priced subs and b) casual fans have free streaming, especially YouTube, to turn to

  4. No question CD’s sales and the resurgence of vinyl sales will out survive digital downloads. After all there is a major difference between a download and physical product and little if any difference between saving a streaming playlist and purchasing a downloading.

    Apple is also to blame for losing any advantage they may have had by failing to better integrating Apple Music and the iTunes store at the launch of Apple Music. Here’s an instance where Apple could have used a U2 type major event, where a five dollar download of the U2 record would have been a huge driver for promoting both services and getting subscribers.

    Instead they squandered the opportunity and created tremendous ill-will by making it a free download.

    Apple is clearly lost without Steve Jobs.

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  6. Great piece as usual Mark and I think you’re right. As a downloader and buyer of vinyl and CD the whole access only model is a bit of an anathema and leaves me, the music fan, cold.

    I wonder if the answer lies in creating experiences and – to that end – in vinyl as a replacement for download. The resurrgence in vinyl is news and has yet to scale commercially to a tipping point to be economically meaningful and sustainable. However, the experience is what newer buyers buy and the opportunity of vinyl (particularly when bundled with digital and innovative experiences – VR anyone?) is a potential way forward.

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  12. I absolutely do think that streaming will kill legal downloads. The fact of the matter is the majority of the population doesn’t really care what they are listening to or they like such a broad amount of modern artists that simply putting Pandora to a station is enough. They rarely listen so closely that they would care to have a few ads inserted occasionally like you have in Spotify. Music is seen as something to turn on in the background. It doesn’t help that so much of the music being released these days all sounds the same.

    The general public only ever got into buying CDs because that was the only way to listen to their favorite artists at home. They only ever got into downloads because data caps and mobile data rates made streaming more difficult for a long time. Now that few people have data caps and music is always available due to constant 4G data connections few people have a reason to use anything other than streaming. The only time it really makes a difference is when you are on a plane or in a foreign country where you have little to no data or high caps. Since for the causal listener music isn’t really that important they would sooner do without in the few circumstances where streaming is difficult.

    The devoted listener has always been a minority but it is only now that streaming has become painless for most smartphone users that it is becoming obvious how small a minority they are.

  13. Streaming on phones is still difficult. Not everyone has Wifi or 4G connections. I have a Tracfone smartphone. Mine frequently switches from 3G to 1X, cutting off my streaming. I’m assuming it switches like that because I live in a rural area. I have no access to Wifi, neither at home nor at work.

    As the article I posted above also pointed out, traveling out of your home country can cut you off of your favorite streaming service due to licensing restrictions.

  14. If they get rid of the iTunes store, will they get rid of the ability to burn CD’s using the iTunes program? That’s what I primarily use iTunes for. If they do get rid of the CD burning option in the program, what other programs will play and burn iTunes files I’ve collected over the years?

  15. Good question Music Lover. Some of my oldest iTunes files contain DRM and are limited to what they can be used with.

    Another issue with streaming is artists being particular with what service they want their music on. Example: Taylor Swift pulling her music from Spotify.

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  19. Stop selling MP3s would be by far – in any regards – the most stupid thing ever happened at Apple aside from firing Steve Jobs back in the days.

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  23. The best solution is something like Google Play where downloads are combined into the same service as streaming – that is the route Apple should take.

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  29. I would say the opposite of an earlier comment. Streaming appeals to the casual fan. Downloading appeals to the serious fan.

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