Friday, April 28, 2006

 

itunes into 2010

Let me begin by saying that this industry is much larger and more competitive than I had thought but Apple and Itunes dominate. Apple shipped 8.5 million ipods in their second quarter of fiscal 2006. Apple also sold 250 million songs via Itunes between 1/10/2006 and 2/24/2006.

I would say that that is dominance. Their ability to sell songs grows everytime they sell an ipod. Additionally, every song (or video, or podcast, or movie) they add to Itunes increases the potential of selling additional ipods. This cycle is facilitated by the tight relationship between itunes and ipods. Apple has relied on the Digital Millennium Copyright Act to prevent people from making software to convert itunes downloads for use on other devices. The act was intended to prevent illegal copying has had an unintended benefit for Apple and had effectively locked out their competition.

The DMCA isn't the only thing working in Apple's favor. As is normal for an Apple product the designs are flawless. Both the ipod device and the itunes software are considered to be state of the art tools. None of the dozen or so competitive devices has the same feel or ease of use. The only complaint against the ipod is the high cost. But Apple is extracting the value that developing a superior product allows. In a sense, you get what you pay for. Apple has also worked to extend the number of products in their line and provide a variety of price points. Overall, Apple has built a trust relationship with their customers and their customers are willing to pay handsomely for it.

It is widely believed (and reported) that Apple doesn't make much profit from the sale of songs on Itunes. But, even if the profit is only $0.04 it begins to add up when you sell over a billion songs. Itunes has become a volume game, the more they sell, the more they use the infrastructure to their advantage. Apple makes up for lack of Itunes profit by a 27% margin on the ipod devices. In fact, when the record companies were recently trying to renegotiate the Apple content contracts they were asking for a cut of the sale of ipods. That is a pretty creative on the part of the record companies.

As I mentioned in my "itunes the user experience" post, Apple has incorporated a number of community building features into the Itunes software. That is a good thing because this industry is about to change and Apple may need all of the help they can get.

Earlier I mentioned that the industry is more competitive than I had thought. I discovered this while attempting to build a 2006 stack . I don't have relative sizes or company sizes but I can estimate them quickly. Apple sells anywhere from 75% to 90% of the mp3 devices on the market. That would then give them a power position in the song download market (250 million songs in 6 weeks is a quick $250ish million). Here is the stack that I pulled together:

2006 Online Music Services

Layer

Sub Layer

Companies

Devices


Apple Ipod, IRiver, Creative, Archos, SanDisk, Sony, Philips, Motorola, Sony Ericsson, Nokia, Motorola,

Online Music Services

Free

Live Music Archives, Cnet

Subscription

Itunes, Amazon, Audible, BuyMusic, eMusic, MusicMatch on Demand, Napster to Go, Napster + XM, MSN, Rhapsody to Go, Virgin Digital Red Pass, Yahoo Music Unlimited to Go, Sony Connect

Record Labels


EMI, Sony/BMG, Universal, Warner Bros., Thousands of Independents


I broke out devices (mp3 players), Online music services and record labels. As it turns out, the record labels aren't as big an issue as I thought they might be. Apple certainly has some type of preferential treatment given that they advertise 2 million songs and their larger competitors advertise between 1 and 1.5 million. It seems that even Sony was able to make arrangements to sell EMI and Universal songs on their Sony Connect website. As such I am prepared to admit that record labels are important but they don't seem to have much power. If the contracts are up for re-negotiation (like the initial discussions in Japan where Sony decided to pass on Itunes distribution) the record labels could cause trouble but they will have to decide if Itunes will help them sell more than they could sell without them.

I will not spend a lot of time on devices accept to mention again that Apple has locked out the other devices. This works ok today because the Ipod dominates the market but if this begins to shift or a better device hits the market, Apple may need to alter this approach. The most likely occurrence is a gradual shift to cell phones that double as mp3 players. Currently Apple has a Motorola device and Sony has an Ericsson device that will work with the respective download sites and play mp3s. As seamless mobility begins to become a reality Apple will need to re-consider their proprietary approach.

Before I move on to the competition, I would like to quickly mention the Apple Itunes situation in France. The French National Assembly recent passed a bill that requires Apple to open its software codes such that their competitors devices will be able to play songs downloaded from Itunes. This may spell big changes for Apple.

Now I am going to briefly cover the service offerings provided by the other download sites. I have broken them into two categories. The first is purchase and the second is subscription. In a purchase plan, the customer buys ownership of each song they would like to own. In a subscription, the customer agrees to pay a monthly fee and is given access to the catalog if songs. If the "to Go" subscription is purchased the user is able to copy the songs to their portable mp3 device. In either subscription mode, once the customer stops paying the monthly fee they are no longer able to listen to the songs. In the case of the songs copied to a portable device, they are programmed to expire at the end of a 30 day period and must be resynched with a valid subscription.

One thing that I learned is that most of the download companies require some sort of installation and of course a registration (and payment authorization) before you can begin to download.

Free

Live Music Archives – This is one of my favorite music sites. It offers free, fan recorded, live concert downloads. The main restriction is that bands must approve the public distribution oftheirr songs. There a quite a few popular bands who have concerts available.

Purchase

Audible.com – This one doesn't fit because they don't sell music, instead they sell Audio books. Thintersticeng this is that the books are variable priced but there is a subscription membership opportunity that will save you 30% on your purchases. There are numerous membership levels that carry a variety of discounts and free purchase credits. Subscribers alsreceiveve a daily audio wsj or nytimes.

Audio LunchBox – This site offers downloads for Independent bands. Once you purchase the song there are no drm restrictions and you can distribute the song rather freely.

BuyMusic – This site is part of the Buy.com family. They have over 900,000 songs and the Top 25 songs are $0.79. The songs are not ipod compatible.

MSN – Offers over 1 million legal downloads. Coincidentally it requires windows media playerqualifieslfies for Microsoft play for sure. The songs are $.99 each. Oddly, MSN advertises for the Rhapsody music service.

MusicMatch Music Store– The Music Match store offers 1,000,000 songs for $0.99. It requires Music Match Jukebox and interfaces with Microsoft play 4 sure. It says that music can be reached any pc but I might be mistaken. They offer a personalized recommendation engine.

Napster Light – Once you register for Napster and download the software you can access the Napster Light store and chose from 1,500,000 songs for $0.99,. The service requires Windows IE and media player required.

Virgin Digital Music Store  The Virgin store is not ipod compatible. They offer songs from 15,000 record labels for $0.99 each.

WalMart – WalMart offers your choice of 1 million songs for 88 cents. The service requires installed software and Microsoft IE. All songs are Microsoft play for sure certified. WalMart offers exclusive live content.

Music.yahoo.com – This site requires special yahoo software and offers 1 million songs and internet radio. The songs sell for $0.99 each.

Sony Connect – The Sony Store only supports Sony devices. They lack the content of itunes but have a broad selection. The site does not mention quantity of songs but the do offer songs from non-Sony record labels. The price is $0.99 per song or you can buy a whole album. The music downloads are in a proprietary Sony music format. The site requires internet explorer and the use of a the connect player software. I found that Sony offers a 6% commission for affiliate referrals plus a $1.50 payment for a cash transaction (that seems to be too much for a $0.99 song).

Subscription

eMusic – This site offers 1,000,000 songs and says that they have 1,000,000 downloads per month. The offer music from Independent record labels. Their subscriptithreeme in threee levels that each offer a fixed number of song downloads.

MusicMatch On Demand – MusicMatch offers 900,000 songs for $4.99 perservice The serivce works on any pc and requires a broadband internet connection.

Napster – Offers 1,500,000 songs for 9.95 per month. It requires Windows IE and media player. The songs are Microsoft play 4 sure certifiedworks service wirks with any pc. They offer a personalized recommendation engine and a purchase option that allows you to keep songs permanently.

Napster to Go – This service is just like Napster except it allows you to load your songs to an mp3 player. The service is a little more expensive and costs $14.95 per month. The songs will expire once the subscription ends.


Rhapsody – Offers 1,500,000 songs for download. If you download the software you can listen to 25 free full songs per month. You can also use the software to listen to radio stations. The service is very similar to same as napster but it uses real audio. They say that they work with ipods.

Rhapsody Unlimited – Rhapsody Unlimited is an upgrade from Rhapsody and allows unlimited downloads from 1,500,000 songs for $9.99.

Rhapsody to Go – Just like Napster to Go, this service allows you to download songs to your mp3 player. They will expire in a month and must be “renewed”.

Virgin Digital Red Pass – This is an extension to the Virgin download store . They do not support Ipods and they allow unlimited downloads from 15,000 record labels for $7.99 per month.

Yahoo Music Unlimited - The Yahoo subscription service is $6.99 per month for unlimited listening to over 1 million songs (if pre paid for the year it is only $4.99 per month).

Yahoo Music Unlimited to Go – For $9.99 per month you get the same songs as yahoo but are able to load them to an mp3 player.

Other

Billboard – Billboard has a website which lists the current Billboard rankings. If you cliconn the purchase cd icone you are linked to mysimon. This seems like a potential opportunity for any number of download sites.

2010 Online Music Services

My 2010 stack doesn't change much. I have no way of knowing what will emerge in the device space. As I mentioned earlier, I suspect that we will see a device convergence and pds'a, mp3 players and cell phone will continue to merge. Given the shift towards "online all the time", one would expect that if mp3 players and cellphones do not merge, mp3 players will have embedded networking technology of some type (possibly a rimstyle connection or maybe a true ip connected wireless card).

I do believe that the download websites will incorporate so much content that it would be wise for any/all of the music information providers to merge or align witBecausenload provider. Becasue of this I have removed the information layer. I also expect that each of the download sites will track and store information about their udeveloplowing thepreferencepe stronger preferrence indicators over time.

Finally, I think that the download purchase option will disappear. From a download provider and subscriptionrspective a subcription service makes more sdramatic would have a dramatice effect on the record becauseand the artists becasue the entire revenue sharing model will collapse. Currently, artists are paid for a song or album purchase. If the model shift they will have to set some type of relative value. It couldn't becausey per use basis becasue the consumer wouldn't be interested in paying multiple times. That might be a more equitable system though.

Layer

Sub Layer

Companies

Devices


Apple Ipod, IRiver, Creative, Archos, SanDisk, Sony, Philips, Motorola, Sony Ericsson, Nokia, Motorola,

Online Music Services

Free

Live Music Archives, Cnet

Subscription

Itunes, Amazon, Audible, BuyMusic, eMusic, MusicMatch on Demand, Napster to Go, Napster + XM, MSN, Rhapsody to Go, Virgin Digital Red Pass, Yahoo Music Unlimited to Go, Sony Connect

Record Labels


EMI, Sony/BMG, Universal, Warner Bros., Thousands of Independents

Apple recommendations:

As I consider the next four years, I come to a few conclusions (one makes me happy, one doesn't, the last I don't care so much about). First, as much as I dread the fact that we are shifting away from music ownership the signs indicate that in the near future music downloads will over take cds as a mechanism for music distribution. As this occurs it is likely that consumers will move towards subscriptions.

Second, as devices converge and become network connected new service will evolve. A good example of this is the soon to be r. The service is reported to offer 50 hours of "saved" content ansatellite access to the satelite radio channels.

Third, as services like Amazons S3 emerge and consumers are given the opportunity to store data online, media devices will be expected to connect to the content. Once again, seamless mobility and the wireless world will enable anytime anywhere content consumption. It shouldn't matter where the data is, the expansion of wireless connectivity should allow its access.

As Apple looks to the future it should prepare for these changes by:

PS. I forgot to mention that Apple has to keep their eye on their customers. That blog that I uncovered a few days ago points out a potential customer trust issue. As the competition struggles to catch up to Apple, they will put the hard seel on their porducts and consumers may be looking for a reason to migrate. In an attempt to retain their customers, Apple needs to make their data privacy clear and do everything they can to make sure they don't run into the same "tracking" issues that trapped Sony late last year.


Comments:
Great analysis.. Well done Dan... This should be an interesting network to watch over time.
 
sorry about some of the wierd text. part of it was the online editor and part of it was me being tired. i would go back and fix it but i think it adds to the originality.

i would suggest that everyone watch the satelite radio introductions around this space. i think it might be a deciding factor.
 
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