Apple's iPod/iTunes Music Store Sets The Standard

by , 11:00 AM EDT, April 7th, 2004

White wires danglin', iTunes tunes jammin'; Apple's iPod and iTunes/iTunes Music Store (iTMS) is the music scene today. So many people have purchased the little-white-digital-music-player-that-could, that some industry analysts believe that it is Apple, a computer company, not some music company, that is defining the direction the music business is heading into. A report from the Financial Times emphasizes just what a good position Apple has found itself. From the article:

Alarm bells rang in November when Mr Jobs told analysts that iTunes was "not a money-maker". Apple stresses that iTunes is out to make a long-term profit but is a volume business. Yet if Apple cannot make money on 50m sales, what hope is there for smaller web retailers?

At the heart of the debate is the price consumers are charged for legal downloads and the subsequent share-out of revenues among record labels, rights owners and retailers. Apple does not discuss the share-out of iTunes revenue. But the consensus among music executives, who asked not to be named, is that on every 99-cent download bought from iTunes, Apple takes about 10 cents, after it has paid 65 cents in record company royalties and 25 cents in credit card fees and distribution costs.

Mark Mulligan, senior analyst at Jupiter Research, suggests Mr Jobs' words should not necessarily be taken at face value. "It discredits his competitors' chances of making money and strengthens his position in negotiating with the labels," he says.

[...]

"Everybody in the software industry knows what Bill Gates did, which was to seize a key strategic choke point and milk it," says John Beezer, founder of the legitimate, Seattle-based file-swapping service Weedshare. "It looks like Jobs is making a strong bid to do that to the music business."

The article also points out that independent label Beggars Group says that iTMS downloads will account for 10% of its US sales in 2004. There's more information in the full article at the Financial Times.

The Mac Observer Spin:

What's interesting about all of this is that Apple started out trying to solve a vexing problem that was plaguing the music industry and music lovers alike, and wound up in the enviable of defining the very industry it was trying to help. At least that's what Steve Jobs told us.

That's not to say that Apple's motives were purely altruistic; by defining a way for music lovers to legally download the tunes they love, while keeping some profits flowing to the record companies, Apple put the iPod at the very core of a new music distribution paradigm. Apple is, after all, a hardware company, and has never hidden the fact that it is in the music business to sell iPods. After selling 2 million iPods and 50 million tunes via iTMS, we say Apple is doing that business quite well, thank you very much.

As the article points out, this is only the beginning; expect Apple to be in an even stronger position once the European version of the iTunes Music Store becomes available. The question is whether or not the company will truly be able to leverage that position, and whether or not it can hold on to its #1 position in both downloads and music players.

A nice little earner going for a song