Here’s Why Apple Just Killed Off iTunes

Apple CEO Tim Cook speaks during Apple’s annual Worldwide Developers Conference in San Jose, California, U.S. June 3, 2019. REUTERS/Mason Trinca

Apple has announced that it is closing iTunes and replacing it with three new apps:Apple Music, Apple Podcasts and Apple TV Apps. While this doesn’t (yet) mean the end of the iTunes Storeit is a major development for Apple. In fact, in many ways, it reflects the way in which Apple is becoming ever more later a follower. The great unbundling process has been going on across digital services for years, with Apple the tech major to cling closest and longest to a unified app experience. Now, just as Facebook, Google and Amazon have a suite of specialist apps, so does Apple. Unbundling is a natural part of the digital cycle, giving users the ability have dedicated user experiences that serve specific needs well rather than many (at best) no so well, (at worst) poorly. Indeed Apple’s Craig Federighi’s tongue-in-cheek quip”One thing we hear over and over: Can iTunes do even more?” hints at just how bloated and no longer fit for purpose iTunes had become.

iTunes never did really shake off its origins

iTunes actually started off as a tool for ripping and burning CDs. In fact, its original marketing slogan was ‘Rip Mix Burn’. It evolved into a tool for managing and playing music and supporting the iPod. Over time it layered in videos, books, apps, Apple Music etc etc. But one thing iTunes never excelled on, even before it suffered from feature bloat, was being a great music player. It was if it could never quite shake off its origins. Apple Music has of course picked up the player baton and run with it for Apple. Now that iTunes has splintered into three apps, we should start to see the evolution of three distinct sets of user experiences. Apple hasn’t pushed the boat out yet because it has a fundamentally conservative user base that has to have change implemented at a steady rate in order not to alienate it.

Unbundling and beyond

With hardware sales are unlikely to drive strong growth again for Apple until it finds its next big device hit, and although Watch and TV could still both rise to the challenge, it is more likely to be a new form factor. Until then, Apple needs its content and services business to pick up the slack. Right now, the App Store generates the lion’s share of Apple’s content and services revenue and there is clearly an imperative for Apple to ensure that it is driving more revenue from its own products rather than simply extracting a tenancy fee from those of others’. With its new suite of subscription services (Apple Arcade, TV+, News+) Apple is now poised to go deep across a wide range of content offerings. Unbundling its apps and subscriptions gives it the agility to build sector specific user experiences and marketing campaigns. Separating out podcasts is particularly interesting, as Apple is making the call that they do not belong with music. A stark contrast to Spotify’s approach. Indeed, Spotify may just be approaching its own iTunes moment, with an app that is trying to do too many things for too many different use cases. iTunes just committedhara-kirito enable Apple to compete better in the digital content marketplace. Spotify may need to do something similar soon.

Extra little thought: does Apple Music the subscription service now become Apple Music+ in order to differentiate itself from the Apple Music app?

Apple’s Subscription Pivot

On Tuesday Apple announced its arrival on the world stage as a media company, using the lion’s share of its product keynote as the platform for a succession of super star actors, directors and other personalities to tell the story of their respective Apple original TV shows. Breaking with a longstanding tradition of using these keynotes to announce new hardware, Apple used this one to showcase content and its creators. While services revenue is still but a small minority of Apple’s business (11% in Q4 2018), there is no doubt that Apple is placing a far greater priority on content – a strategic pivot made necessary by slowing device sales in a saturated global smartphone market. Apple has already made itself a power player in music, but has the potential to turn the entire digital content marketplace upside down should it so decide.

Apple’s ramping up of its content strategy is best understood by looking at its place in the four stages of media formats:

1. Phase 1 – physical media formats:In the old world, consumer electronics companies came together to agree on standards and then competed in a gentlemanly fashion on execution. This approach underpinned the eras of the CD and DVD.
2. Phase 2 – walled garden ecosystems: In the internet era companies competed fiercely, building proprietary formats into impenetrable walls that locked consumers in. This resulted in the rise of walled gardens such as iTunes and Xbox.
3. Phase 3 – post-ecosystem: App stores became the chink in the armour for walled garden models, allowing a generation of specialist standalone apps such as Spotify and Netflix.
4. Phase 4 – aggregation: Walled garden players had inadvertently created global platforms for specialist competitors, so are now figuring out how to avoid going the route of telcos and becoming dumb pipes. The likes of Xbox, Amazon and Apple have started to embrace some of their standalone competitors, adding curatorial layers on top via hardware and software. This is how we have Amazon channels, Fortnite’s marketplace within Xbox and, soon, Apple channels.

Apple just prepped its content portfolio for a subscription pivot

Apple built its modern-day business firmly on the back of content. The iPod was the foundation stone for its current device business and simply would not have existed without music. While its current device portfolio meets a much wider set of user needs, content remains the use case glue that holds its device strategy together. On Tuesday Apple announced new subscriptions for news (News+), games (Arcade) and video (TV+). Interestingly, in an entire keynote focused on media, Apple Music did not even get a mention, despite Zane Lowe’s Beats One show providing the background music prior to the presentations. Perhaps Apple felt Apple Music is so well established that it did not merit a mention, but the lack of an update felt like more than an oversight, intentional or otherwise.

That aside, Apple now has prepped its content proposition for a subscription pivot. Prior to these new announcements, Apple’s content offering (Apple Music excepted) was firmly rooted in the increasingly archaic world of downloads. Shifting from downloads to streaming is no easy task, and Apple will have to tread a cautious path so as not to risk alienating less adventurous download customers. It is the exact same shift that Amazon is navigating. But now Apple has the subscriptions toolset to start that journey in earnest. It has decided that subscriptions are ready for primetime.

This primetime strategy underpins Apple’s early follower strategy across its entire product and services portfolio. As its customer base has gotten older and more mainstream, it has had to progressively stretch out launches, to such an extent that at times it looks at risk of being too late. Apple Music looked too late when it launched, but still made it to a clear number two position. TV+ was even later to market, but don’t count against it plotting a similar path to Apple Music.

What Apple needs from content

Watch and TV could both be long-term contenders for Apple’s revenue growth until it launches a product category to drive new, iPhone-scale hardware growth, but the odds are not yet in their favour. Services look like the best midterm bet. But Apple has some tough decisions to make about what role it wants content to play in its business. This is because subscriptions pose two challenges for Apple:

• Margin could be a real problem:Apple’s high profile spat with Spotify over its App Store levy hides a bigger commercial issue. With margins in streaming as low as they are, Apple most likely makes more margin on its Spotify App Store levy than it does selling its own Apple Music subscriptions. The amount of money it has invested in its lineup of TV+ originals is also unlikely to do its services margins any favours.
• Subscriptions have to get really big: Standalone subscriptions will not only be low (perhaps negative) net margin contributors, but will not deliver enough revenue. It would take more than one billion Apple customers paying for two $9.99 subscriptions every month of the year to generate the same amount of revenue it currently makes from hardware. The App Store is Apple’s current services cash cow, and Apple’s new slate of subscriptions are preparing for a post-App Store world. Yet it would take a hundred million $9.99 subscriptions every month of the year to get Apple’s services revenue to where it is now. That number is eminently achievable but generates revenue stagnation, not growth.

Doing an Amazon

So how does Apple square the circle? Probably through a combination of standalone subscriptions, bundles and a single Apple bundle plan. And yes, once again, this is exactly what Amazon has been doing for years now. In fact, you could say Apple is doing an Amazon. The Prime-like bundle could be the most disruptive move of the lot. Imagine if Apple, alongside the full-fat subscriptions, deployed a lite version of Music, Games and TV+ available for a single annual fee and / or as part of a device price (like Amazon Music Unlimited vs Amazon Prime Music). This option would mean that Apple would be simultaneously doing free without ads and subscription with fees. The implications for pure subscription and ad supported businesses are clear.

Whatever options Apple pursues, the permutations will be felt by all in the digital content marketplace.