Tuesday, April 25, 2006


breaking down itunes

Itunes: The Origin
Apple launched Itunes on April 28, 2003. By February 23, 2006 they had sold 1 Billion songs downloads. How did this happen? How did it happen so quickly? Where do they go now?

Wikipedia: Itunes
According to Wikipedia Itunes sold 275,000 songs in its first 18 hours. So it shouldn't surprise us that they 50 million in just under a year. Then they roughly doubled their sales in under 6 months. Then they just about doubled again in 3 months. At that point we had reached December of 2004 and Itunes had been in business for just 20 months. The staggering growth continued: 400 million by May 2005, 850 million by January 2006, and finally 1 billion in February of 2006.

What exactly was Itunes selling? Today, Itunes advertises a 2 million song catalog (not to mention 3,000 videos, 20,000 podcasts and 16,000 audiobooks). All of these songs are available for download at the low price point of $0.99.

How much profit does Apple take? From all accounts it seems like they make around $0.04 per song. In contrast the record labels receive $.60-$0.70 per song and the music publishers take around $0.08. Those numbers put Apple's Itunes site at break even if not a loss leader.

Why would Apple do that? Clearly the game is for Apple to sell more Ipods. The Ipod is a higher ticket item and Apple receives about a 27% margin. It is an interesting approach (and a clear example of network effects) - sell a cool gadget and people want content, provide lots of content and more people will consider the gadget. Once they start the cycle, the trouble will be keeping it energized. Eventually the steam will run down and they need to find more content or build a better gadget (the video ipod is a perfect example of this). Another wrinkle (some might safe beauty) to the Itunes site is that the content's usability is locked into the ipod device. Itunes delivers the content in a proprietary format which is natively playable in the ipod. The standard Itunes software will not talk to other mp3 players. There are software hacks and patches available that will enable itunes to work with other devices but 75% of the mp3 players sold are Ipod so the market is pretty well controlled by Apple.

Where did the content come from? Prior to the Itunes launch in 2003 Steve Jobs entered into US market contracts with the five (now four) major labels: EMI, Universal, Warner Brothers and Sony/BMG (separate in 2003). I am not sure how much content was originally provided to Apple by each of the labels but it was only about 200,000 songs. Today they have 10 times that number. Not too long after launch Apple signed a contract with CdBaby to distribute digital music for the 100,000 independent albums that they are lisenced to sell.

What is Sony thinking? The proprietary nature of the device and the itunes store creates an interesting relationship with Sony. Sony has business units for both music content and devices. By selling through Itunes (which doesn't recognize the Sony devices) Sony has put themselves in an interesting position. In general, all of the record labels would like Itunes to work with more devices because their market would grow but Apple correctly thinks it is foolish for them to change. The Sony situation is complicated because Sony runs their own online music sites (a cd store plus sony connect, itunes and 5 other digital sites). In addition to selling their own digital music, Sony sells devices that compete with the Ipod. The co-optition puts Sony smack in the middle of a situation where every song they license to Itunes may cost them a device sale.

Who holds the power? Jobs struggles with Labels over flat rate pricing
Jobs holds the power

Apple v. Apple I
Apple v. Apple II

Cooperation Required (apple and sony - strange bedfellows)

Downhill Battle

Songs complement the Ipod? Apple gets the Value

Will Amazon challenge Itunes?

Content providers not just the big boys

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