How iPod changed everything

Apple just announced that it is finally ending production of the iPod. At 21 years of age, it outlived many of the dramatic changes it witnessed and triggered. In this age dominated by streaming (and a vinyl resurgence) the iPod did not really have a place anymore, other than with its ever diminishing base of super fans. It should probably have ceased production long ago, but the iPod holds a special place in Apple’s heart and sentimentalism likely played a role in allowing it to reach its 21^st birthday before it was finally put out to pasture. And there is no doubt that the iPod earned that special place, because it was the change catalyst that transformed Apple into the mega corporation that it is today. But the iPod did even more than that, it was the trailblazer that created the environment in which today’s digital entertainment world could exist.

Back in my early days as an analyst I went to my first ever Apple analyst briefing, for the launch of the second generation. I felt like a fish out of water, with the room full of dry tech analysts asking Apple about its education strategy, its server products, its enterprise computing strategy. Then little me in the corner, asked about the iPod, and the entire room turned to me with bemused faces, just like the pub scene in American Werewolf in London.

Every successive briefing session I went to, the iPod became an ever bigger deal and the other analysts in the room started asking questions about it too. The iPod shuffled along at a steady pace until the launch of the iTunes Music Store, at which point it suddenly had a purposes it previously lacked, and sales lifted off. Apple has never looked back.

It is no coincidence that it was music that propelled the iPod to tech immortality. Steve Jobs was a massive music fan and it was his passion that helped ensure the iPod continued to receive the support it needed, even when it was not yet showing signs of fulfilling its huge potential. Apple has always been a company that is as obsessed with content as it is hardware and this is why the iPod and subsequent Apple devices have been so central to the growth of digital entertainment.

As the iPod evolved from scroll wheel to touch screen it became the launchpad for something even bigger for Apple: the iPhone (the first gen iPhone was a direct evolution of the iPod touch, at a time when smart phones were all keys). With the iPhone came apps. Just in the same way that the iPod was not the first digital music player, so Apple was not the first to make mobile apps nor of course the first to make a smartphone. But in all three cases, Apple took a promising but struggling format and made it ready for primetime. This early follower strategy underpinned Apple’s success in the 2000s and the early 2010s.

Pandora was an early beneficiary of Apple’s app strategy, being natively installed on US iPhones. The result was another lift off, with Pandora soon becoming he most widely used streaming app on the planet, even though it was only available in the US. Just as with the iTiunes / iPod combination, Apple understood the cruciality of an integrated content / device experience and its App Store became the launch pad for today’s digital entertainment economy. It did so by allowing app developers across the world to find a global audience which did not need to worry about clumsy installations and fragmented billing. Everything happened in one place, seamlessly and effortlessly. Google soon followed with its own take on the app store. Now you will struggle to find a games, music, video, news, podcast or book provider that does not use the Apple App Store, nor indeed a consumer that does not use apps to consumer content. 

Apple’s subsequent launch of the iPad and Apple TV further accelerated the adoption of digital content, giving audiences and content companies more choice about where they could benefit from the app economy. Apple Music, Apple TV, Apple Books, Podcasts, News, Arcade and more followed, helping cement Apple not just as a catalyst for the digital entertainment economy, but also as a major content player in its own right.

None of this would have happened without the iPod. So even though many readers will be too young to have even owned an iPod, spare a thought for this now departed member of the digital ecosystem, because without it, the devices you use and the entertainment you consume would look very, very different.

Farewell iPod!

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

• More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
• Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
• Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.

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.