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The Back Page
by Bryan Chaffin

50 Million iTunes Downloads: Missing The Big Picture
March 16th, 2004

Apple has sold 50 million songs through the iTMS, and is currently selling some 2.5 million songs per week. That's up from 1.5 million per week in the middle of December, but far short of Apple's stated goal in October of selling 100 million songs before the end of April.

According to one well-known troll in TMO's comments, that's a clear sign of Apple's decline because Apple is going to miss its goal of selling 100 million songs in the first year of operation. Of course, it takes an amazing stretch of the imagination to conclude that an increase from 1.5 million songs per week to 2.5 million songs per week is a sign of decline, but I think that everyone, including our troll, is missing the big picture on this.

Sidetracks

It's easy to get sidetracked, especially when people get all hot and bothered about semantics. For instance, there was a lot of hype and hubbub over whether or not Apple would actually miss its 100 million song goal from the folks (or "kids," as I referred to them in a moment of heat in an article comment) at MacDailyNews.

In an article titled "CNET incorrectly reports Apple missed iTunes 100 million song goal," MDN opined that CNet, and by implication others who also reported this, was wrong in saying that Apple was going to miss its goal. From MDN:

This would all be very interesting, if it were true. However, unlike CNET, we are forced to let the facts get in the way. Fact number one is that until April 28, 2004, the one year anniversary of iTunes and the date Steve Jobs' set for the 100 million song goal, Apple has not failed to hit its target. Fact number two, and this is the big one, is that Jobs plans to count the Pepsi redemptions toward the 100 million songs sold - after all they are actually songs sold. The songs redeemed are paid for by Pepsi.

This led to a barrage of comments from MDN readers demanding that we retract our coverage, titled "TMO Reports - Apple Claims 50 Million iTunes Downloads, Will Miss One Year Goal."

Of course, our report was accurate in the first place, but we double checked with Apple this morning just to be certain. Sure enough, Apple says it will miss its goals, and Apple says that Pepsi downloads won't be counted towards the goal of selling 100 million songs.

For anyone keeping score, I obviously took great offense that people would think even for a moment of taking a site like MDN's word over ours, CNet's, or the BBC's, especially when it was so obviously born of nothing more than their speculation, as opposed to the fact-based reporting we offered in our report. Then again, of the many thousands of people who read our article, only a few posted such silly demands of retraction...

I am sure the apologies from those demanding such a retraction will begin rolling in any second.

Counting

To be honest, the biggest surprise in all this is that Apple is not counting Pepsi giveaways in these public counts, or towards its year-end goal. One would think that Apple would want to tout every download it can. The logical conclusion from that seeming contradiction is that there is something in the Pepsi numbers that displeases Apple, or there are reasons (such as the audit issue mentioned in our follow-up article) that preclude Apple from doing so.

The big picture

See how easy it is to get sidetracked, and miss the big picture? I just wasted a few hundred words explaining why our report was indeed accurate.

While Apple hitting its goal would have been great news, the big story here is what Apple has accomplished. The company is selling 2.5 million songs per week, and is on track to sell 130 million songs over the next year. In addition, as we reported this morning, Apple sees a further uptick in iTMS sales (20-25 million over the next six and a half weeks), which could put annual sales going forward well above the 130 million mark.

That's a remarkable feat. Think about it. Working only from the numbers that Apple has officially claimed, 50 million songs is the digital equivalent of some 4.2 million CDs (assuming an average of 12 songs per CD). That's absolutely amazing, especially considering the fact that people can go steal all of the music they want on the piracy networks.

When Apple launched the iTMS, no one had been successful in selling songs on the Internet. No one. Indeed, there is still nobody else besides Apple that cam claim any success in selling music on the Internet. The nearest competitor is Napster, which has sold some 5 million songs in the last 4 months. Not only is Apple the king of the roost, the company is moving a lot of product in a brand new market.

Finances

That's all well and good, but there are financial issues here, too.

Everyone knows, of course, that Apple's real profit from the iTMS comes from related sales of the iPod. We know this because Steve Jobs has sung loudly, proudly, and often that Apple isn't making any money in the download business. When he isn't saying so, Phil Schiller is. Their point, of course, is that no one else should even bother to try.

For what it's worth, I agree with them, at least until download services can deal directly with the artists, cutting out all the money that currently goes to fatten the record labels. When that happens, the services and the artists could both make substantially more money, while charging less than 99 cents per song. I consider that rate outrageous, as the vast majority goes directly to the label, and not the artist or service.

I think, however, that Apple will, if it hasn't already, cross a point beyond which it can make a profit, even with the current business model. While Apple might not make money selling a million songs per week, or maybe even 2 million songs per week, the economies of scale will eventually catch up, allowing the company to turn a meager profit.

Even a penny a song translates into US$2,500 in profit per week at the current levels. While that's a drop in the bucket to a multibillion dollar company like Apple, it is profit (as if thirty or so iMacs were sold, or maybe fifty 40 GB iPods). In addition, there is money to be made off the cash flow in and of itself, and an extra US$2.5 million in weekly cash flow is nothing to sneeze at.

Furthermore, there is the goodwill towards Apple that the iTMS brings to the company. Each and every one of those people buying songs at 99 cents a pop is making the decision to shop at Apple. Statistically speaking, some of those people will consider buying a Mac at some point, too. For those people, they have already made part of the decision to do business with Apple. That's good for the platform as a whole. Again, statistically speaking, the more songs Apple sells, the more new Mac users are included.

Influence

Lastly, there is the amount of influence that Apple has in the music business, a business that the company obviously thinks is important to its future. The more songs Apple moves, the more the industry will need the company. That gives Apple leverage in future negotiations, and might possibly even facilitate moving to the era of dealing directly with the artists.

I read today that the industry sells some 750 million CDs per year in the US. If Apple sells 130 million songs in the next year, that is the digital equivalent of more than 10.8 million CDs, or 1.4% of the market. 1.4% of the market belonging to a single retailer is an enormous share. That would make Apple a significant player in the music retail business, and not just the online music retail business.

In that scenario, Apple's leverage in this market would be enormous, possibly second to Walmart.

Remember, too, that this would be only the second year of operation at the iTMS, and assume that Apple's sales growth leveled off where it is today. I don't think that likely.

While Apple might be missing its goal for first-year sales, the company has still accomplished an amazing feat by moving 50 million songs since the iTMS was launched. If the company hits its newer expectation of 70-75 million songs by April 28th, it will be even more amazing.

In the big picture, that is big, big news.


began using Apple computers in 1983 in a high school BASIC programming class. He started using Macs in 1990 when the Kinko's guy taught him how to use Aldus PageMaker, finally buying a Power Computing Power 100 in 1995. Today, Bryan is the Editor of The Mac Observer, and has contributed to the print versions of MacAddict and MacFormat (UK).

You can send your comments directly to him, or you can also post your comments below.

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