Transcript Of Apple's iTunes Conference Call

T he following is a transcript of yesterdayis press conference from Steve Jobs concerning the first anniversary of the iTunes Music Store (iTMS).

Operator: Good day and welcome to this Apple Computer April 28 conference call. Todayis call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Corporate Communications, Ms. Katie Cotton. Please go ahead, maiam.

Katie Cotton: Good morning, everyone. Thanks for joining us. Iim here with Steve Jobs, Appleis CEO. Steve is going to start this morning with some remarks and then open the call to questions and answers from the press. So with that, Iid like to turn it over to Steve.

Steve Jobs: Good morning. We hope youive had a chance to read our press release, and hopefully even download a copy of the new iTunes, because today weire celebrating the first anniversary of the iTunes Music Store. We launched it a year ago today and we are thrilled with the results that weive seen in just one year.

The iTunes Music Store has really revolutionized the music industry with its 99 cents per song pricing, itis free previews of every song on the store in high quality, one click purchasing and downloading, and ground breaking and uniform personal use rights. And in its first year, music fans have purchased more than 70 million songs, clearly making it the number one online music service in the world and having more than 70 percent market share of the legal downloads for singles and albums.

So, again, itis exceeded our wildest expectations during its first year. Currently, iTunes customers are purchasing around 2.7 million songs per week. That is a rate of 140 million songs per year, so we feel we have a lot of momentum there.

To kick off its second year, today weire launching the third generation iTunes Music Store and we have now the largest online music catalog in the world with over 700,000 songs from our partners at the five major music companies, so thatis Warner, Universal, EMI, BMG and Sony, as well as over 450 independent music labels. So, weive gone from...we started with 200,000 songs a year ago when we kicked off iTunes. We now have over 700,000 songs and we expect to have over a million songs by the end of this year.

The new third generation iTunes Music Store and iTunes Music Jukebox have some new really cool features that Iid like to cover as well. The first one is called iMix. Itis a new way for users to publish the playlist of their favorite songs on the iTunes Music Store, so theyire not, theyire not sending a list of their songs to their friends in e-mail. They are actually publishing the songs in their favorite playlist on the iTunes Music Store for every other iTunes user to preview. They can preview their songs. They can rate their playlist by voting, and of course, they can purchase the songs. And it really creates a virtual iTunes community letting iTunes users discover new music thatis recommended by fellow music fans and rate their iMixes. So far this morning, since we put the new store up around midnight last night, weive already had 1000 people post iMixes and over 5000 people vote. Thatis about...[that] data [is] about a half an hour to an hour old, so Iim sure the numbers are higher now. I think this is going to be a really exciting new feature.

The next feature is called Party Shuffle. Most of us know what shuffling is. This is sort of an advanced shuffle, which shows automatically chooses songs from your music library, displays the just played and the upcoming, about to be played songs, and letis you easily rearrange or add or delete the upcoming songs on the fly like a DJ would do. Itis the perfect DJ for parties and other gatherings, but itis also a really great way to listen to your own music library and get reacquainted with songs that you might not normally play, but there was a reason you put them in your personal music library to begin with, and you can rediscover that. We think itis going to be very popular.

Another new feature that weive added is called Radio Charts. Now, weire the first people that added really great Billboard Charts to online music and itis been a big hit. Weive gone even further now with Radio Charts. Letis say youire driving home from work and you hear a really great song on the radio. Well, now with Radio Chart you can get home, look up that radio station in iTunes and see the playlist of the songs theyive been playing, find the song you heard and buy it with just one click. Itis pretty cool. So, thatis Radio Charts.

We now have a new music video section on iTunes, a video section which pulls together all the music videos. We have more than ever now and weive also added a movie trailer site, so that if youire in iTunes you can watch movie trailers right then, right there, and we have links to buy songs from the soundtrack to that movie or possibly audio books related to that movie.

Now, weive also enhanced the rights that you get when you buy a song. You can now play songs purchased from the iTunes Music Store on up to five personal computers, thatis up from three personal computers before, and that includes not just new songs you buy from today on, but all the songs you ever bought in iTunes you can now play on up to five personal computers. And this is really -- this has really been from feedback from users and ourselves. I mean, you know, youive got machines at home, maybe itis not just your computer, but maybe you want to play your music on a spouseis computer, maybe one of your kidis computers. Youive also got a computer at work youid like to have your music on and youive got a notebook for when you channel, and it adds up real fast and we think going to five personal computers is going to make a lot of people very happy.

One of the other big requests we got from our users is the ability to create and print jewel case inserts for the CDs that they burn. And weive added this to iTunes where it will automatically create just stunning CD jewel case artwork combining, you know, the album art and the track listing and weive made a lot of it come with some professionally designed templates, so the things just look great and we think, you know, for compilation CDs as an example, iTunes automatically generates a mosaic of the album covers representing the songs. Itis really quite nice and I think the best itis ever been done and customers are going to be very happy with this.

Another thing weive added is automatic WMA to AAC conversions, that is automatic conversion from WMA -- which is the format that many people use on Windows -- to AAC -- which is the format that iTunes uses -- so that Windows users can automatically create iTunes versions of the songs encoded in unprotected WMA, which means if youire adding iTunes to your PC, youive got a music library in WMA, it will automatically create an iTunes version that is playable in iTunes, allow you to convert your library to iTunes and sync it to iPod just really in a snap. And this is going to help us a lot in the Windows market along with HP and some of the other things weire doing and weire excited about that.

And we also have a new lossless encoder that delivers true CD quality in almost half the file size that we think some of our audiophile customers are going to appreciate as well.

Now, one thing I want to highlight so that you hear this from us first is we have one other change in our personal use rights, which is that, you know, honoring our commitment to discourage music theft while preserving their personal use rights. We listened to the labels quite a bit and looked at a lot of data that they had and in conjunction with them we are reducing the number of times a user can burn the same playlist onto CDs from ten to seven. We donit think this is going to affect very many of our customers at all, and we think that expanding the right to play songs that are purchased from the music store on up to five computers instead of three is a far bigger deal and will benefit many more users.

Now, Iid like to point out that users, of course, can still burn a single song an unlimited number of times, so you can put your favorite song on as many playlists as you want and burn it forever, and of course, users can listen to their music on an unlimited number of iPods.

So, in summary, weire very, very excited about the results from the first year. Weire very excited about the iTunes 4.5, the third generation of the music store. And weire really excited that with iPod and iTunes we can show what Appleis innovation, engineering and marketing can do when weire not limited by our five percent operating system market share ceiling.

So, with that, Iid like to open it up for questions. If there is any questions we havenit answered in the press release or this morning, weid love to try to answer them now.

Operator: Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star followed by the digit one to ask your question. And weill pause for just a moment. Weill take questions in just one moment.

And our first question today will come from Steven Levy with Newsweek.

Steven Levy: Hi, Steve.

Steve Jobs: Hi, Steven. How are you doing?

Steven Levy: Good. How are you? Congratulations for the year. A couple questions, related questions, about the negotiations with the labels there. One, was there any discussion from their point of view of changing the price? Weive been hearing about how the labels might want to get more for online songs. And second, did they ask you to make the songs purchased on the iTunes store playable from other devices? In other words, ask you to license FairPlay to other third parties?

Steve Jobs: Great. Let me answer those two things. First one is the price for songs in the iTunes store is remaining 99 cents per song, and we think thatis what customers want and thatis what weire delivering. So the prices will remain 99 cents per song and any rumors to the contrary are simply not true.

And secondly, no, it never came up in our discussions with the labels that they would like songs purchased on the iTunes Music Store played on other portable music players other than the iPod. Possibly thatis because the iPod is the most popular portable digital music player in the world with close to a 50 percent market share of all MP3 players on the market, including even $50 Flash based players. So, as you know, the iPod has grown into a billion dollar business in a little over two years and we ship more than three million iPods to date with more than 800,000 iPods sold last quarter alone. So you know, itis hard to even say who number two would be.

Steven Levy: And the 99 cents, that didnit come up either? Basically that was something that was assumed it would not change?

Steve Jobs: Well, Iim not going to go into details about our negotiations with music companies except to say that Apple and the music companies are offering these songs on the iTunes Music Store for 99 cents a piece, same as always.

Steven Levy: OK. Thanks, Steve.

Katie Cotton: Thanks, Steve. Can we have the next question?

Operator: Our next question weill hear from May Wong with Associated Press.

May Wong: Hi, Steve. I wanted to know why you decided to lower or reduce the number of playlists from 10 to 7. Was it specifically at the request of the music labels?

Steve Jobs: Yes, it was. They feel very strongly about this. You can understand that their industry is under siege from people making illegal copies of their product. We can certainly understand that. We have piracy in the computer industry as well, and it really is hard to...itis hard to understand why, you know, the average honest individual would even make seven copies of the exact same playlist onto CDs.

As a matter of fact, as iPods increase their popularity every single month, you know, someday maybe, you know, burning CDs may look pretty primitive. So you know, seven burns is, I think, going to serve the needs of every honest user, more than serve their need. I doubt if most of our customers will ever run into that limit.

May Wong: All right. And is there any...Iim there any chance that you would talk to Real Networks or any other...any other folks who are obviously very interested in working with Apple at this point to expand their...somehow get their collections and the songs that are purchased in their stores onto the iPod?

Steve Jobs: Well, weire talking to people all the time, and so I think weire all ears all the time. You know, HP is a perfect example. When HP called us up and asked us something even more radical, based on our history, than anyone else has, which is "Would you consider letting us resell the iPod and put iTunes on our computers?" Weive never done anything like that and we were able to work out a great relationship with HP. Theyire already shipping iTunes on their personal computers and they expect to ship over eight million copies of iTunes on their personal computers in the next year and theyill be...theyill be, you know, distributing iPods starting this summer.

So, weire open to all sorts of things. We will see some, you know, continue to see some things roll out over the course of the next year.

May Wong: OK. Thank you.

Katie Cotton: Thanks, May.

Operator: And our next question weill take from Warren Cohen with Rolling Stone.

Warren Cohen: Hi, Steve. Just wondering and wanted to follow-up on something that was in USA Today, also on the pricing that the album prices are creeping up a little bit higher than $9.99. I wondered if prices have raised just on the full albums and not necessarily the songs and if thatis coming from you guys due to this success or to some of the label agreements.

Steve Jobs: Well, let me tell you how we...first of all, that the USA article was inaccurate. There clearly are some albums on iTunes, thereis a few of them, that are priced a little higher, but the vast majority of albums are $9.99 or below and, you know, believe me, theyire, you know, theyire aggressively priced. But the way we do it is that every song on iTunes is 99 cents, but the album prices do float around a little bit based on what the labels want to charge for them, and we encourage the labels to price them aggressively because, as you may know, over 40 percent of the songs sold on iTunes are sold as albums. I think it actually approaches 50 percent. And so, the more, you know, the more reasonably priced the albums are, the more it encourages users to buy the full album rather than their three favorite songs and everybody wins that way.

But in any event, most of the albums on iTunes are priced at $9.99 and below and, no, theyire not creeping up. Thereis always a few that are a little higher than you can go in and pull out, but theyire very, very competitive and we see in the future the prices of the albums coming down, not going up, because thatis what itis going to take to sell more albums and itis in everybodyis best interest to do so.

Warren Cohen: Great. Thanks.

Operator: And our next question weill take from Mike McGuire with Gartner Group.

Mike McGuire: Morning, Steve.

Steve Jobs: Hi.

Mike McGuire: Quick question. Youive helped the music industry kind of see the light in terms of online music, legitimate online music distribution. Iim curious what you think the next big hurdle is that youire going to have to help them clear, and by that...them...I mean content providers, producers, et cetera.

Steve Jobs: Oh, thereis, you know, thereis a lot of challenges that we all face together. Let me give you one thatis really exciting to us, which is that if you look at a typical music company, less than a third of their music that they have in their vault is actually available for sale. And the reason for that is, is because with traditional CD distribution channels where you have to make a physical object, somebody has to carry the inventory, somebody has to make, you know, rent space to put it on a shelf, they canit get distribution for a lot of their catalogues thatis sitting on their vault because it wouldnit sell enough to justify, you know, the record company...the record stores carrying it. And itis getting even worse with the demise of the small individual record store and the tendency of, you know, of Wal-Mart and Best Buy, et cetera, the selection is even narrowing further.

And one of the most exciting things for us is to get the rest of that catalogue, which has not been purchasable, in some cases, for decades, digitally encoded and online on the iTunes Music Store where there is no inventory, where there are no returns, where there is no rent for the shelf space, and make that music available to everybody.

Obviously one of the biggest things weire working on right now is expansion outside the US, and, you know, weill be in Europe later this year and obviously working on places beyond just that. So, weire working very hard with the music companies on that as well, and thereis a bunch of other initiatives we have. So, thereis a lot of work left to be done.

Mike McGuire: OK. Great. Thank you.

Katie Cotton: Thanks, Mike.

Operator: And now weill move on to Josh Bernoff with Forrester.

Josh Bernoff: Hi. Thanks for taking my question. Thereis two things I want to know. First of all, I know we heard about the user who has the $29,000 worth of iTunes and Iim interested in how broad the service is. You said 70 million tracks, so how many people...actual individuals have bought music? The other question Iim interested in is will you do a subscription service to match up to what everybody else is doing in this space?

Steve Jobs: Great. We donit disclose the number of accounts we have for competitive reasons, but weire very, very happy with the number of accounts we have. As far as the subscription service, you know, we looked at that at the beginning and we continue to look at it now and then, but just as we saw in the beginning, the subscription services are not succeeding. People want to own their music, not rent it.

Let me give you an example. Unlike video, where you will watch your favorite movie maybe 5 or 10 times in your life, in music, youill listen to your favorite song maybe a thousand times in your life, so if I want to buy my favorite song today on iTunes, I spend a dollar and I own it and I can listen to it for the rest of my life for that one dollar. But if I rent that song for a dollar, and I pay $10 a month for the privilege of renting my favorite songs, thatis $120 a year, in a decade thatis $1200 Iive paid to rent my music for the privilege of listening to my favorite song in 10 years.

Itis pretty expensive, so people have bought LPs, if theyire old enough. Theyive bought cassettes. They are buying CDs now. You know, purchasing and owning music is a very ingrained thing, and I think thatis one of the reasons the subscriptions have failed, and you know, everybody at the beginning of this trend to online music thought they wanted to be the next AOL and get subscriptions every month, but the customers didnit agree with them and we donit see the subscription services doing that well.

So, you know, we continue to monitor it, but itis a problem. The other problem, of course, is, you know, when you subscribe to music, you donit get a chance to put it on your portable player and take it with you. You can listen to it on your computer and pay a lot of money for the privilege, but you canit take it with you unless you...unless you pay more money. And customers donit like that either.

Josh Bernoff: So, youire not thinking that Microsoftis strategy with Janis of making portable player support subscription makes any sense?

Steve Jobs: Well, hereis the deal, Microsoft doesnit own the content and the content owners donit think thatis a very good idea. The content owners are not going to license their content through a subscription model to be put on portable players for $10 a month. Give them $50 a month and theyill think about it. Some of them wonit do it at 50, maybe others will, but of course, nobody would pay that.

So, at a price that customers will pay, the content owners are -- we do not believe, and they all told us -- theyire not willing to license their content through a subscription model where the user has the rights to put it on a portable player, so we can create all the technology we want, but if our music store doesnit have any songs in it, itis not going to matter.

Josh Bernoff: OK. Thank you.

Katie Cotton: Thanks, Josh.

Operator: And weill move on to Rob Pegoraro with The Washington Post.

Rob Pegoraro: Good morning. My question is two of them, actually. One of them is the change in how many times you can burn a playlist to CD, so far thatis been 10 times in a row and then the counter resets. Has that behavior changed or is it 7 times, ever?

Second of all, I found it interesting to see in the press release that thereis now this encouragement with five...with the ability to share your music among five computers. You could put one in the living room, which is something that a lot of third party device manufacturers are trying to get a dead market by simply making various media receivers, what Slim Devices makes, what (Rocco) makes. These folks have said that theyive tried to license air play so that you could, in fact, share your playlist with one of these things, which cost a lot less than a computer. Is that sort of dealing in the cards at any point?

Steve Jobs: Well, let me try to answer your questions. The first one, you were describing how our burn limitations work now, but I think youire describing them inaccurately. We have a 10...we had a 10 burn limitation before.

Rob Pegoraro: Right.

Steve Jobs: And now weire going to seven.

Rob Pegoraro: Right.

Steve Jobs: And I wasnit sure exactly what your question was.

Rob Pegoraro: I just want to make sure that the underlying -- the difference -- one of the differences that sort of gets overlooked, I guess, between iTunes, for instance, and Real is with Real they say you can burn a playlist five times. Thatis five times ever. The count doesnit reset after you burn some other playlist. I wanted to make sure that that hasnit changed.

Steve Jobs: Well, our count doesnit...our count is never reset when you burn some other playlist either, so I think you might have that wrong.

In terms of media receivers in the living room, you know, weire familiar with a lot of these other devices. We think a lot of things will come on the market, you know, over the course of the next year or two and weire talking to several of those folks. Thereis really nothing to announce at this time, but so far nobody has really sold very, you know, very many of these devices, so weire talking to several of these folks and sooner or later there may be one of them that is successful.

Rob Pegoraro: Thanks.

Katie Cotton: Thanks, Rob.

Operator: And next weill hear from Peter Brennan with Bloomberg News.

Peter Brennan: Hi, Steve. Thanks a lot for taking my question. With this many songs you sold, can you say how much revenue was generated as a result?

Steve Jobs: Well, know, you can multiply 70 million by 99 cents a song and you can attenuate that a little bit because some of those songs were bought as albums, so thereis over 10 songs on an album, theyire a little less than 99 cents a piece. And you can do your own estimate pretty accurately.

Peter Brennan: Oh, OK. So, it would be pretty close to, I guess, $70 million. Would that be accurate, then?

Steve Jobs: Well, Iill let you do the math but...

Peter Brennan: OK. OK. And is this helping iPods sales and Macintosh sales?

Steve Jobs: Weid like to think it is.

Peter Brennan: That doesnit sound very positive, though.

Steve Jobs: Well, weive announced our iPod numbers every quarter, so I think if you go back and look at them youill see that thereis a very strong upward trend and we think the iTunes Music know, fundamentally I guess the best way to say it is that Apple is the only company in the world that offers the unbeatable combination of the iTunes Jukebox, the iTunes Music Store and the iPod, which together offer music lovers really the only seamless experience in the world for discovering, buying, managing and enjoying music anywhere. Apple is the only company that can do this all and make it all work seamlessly together. Weire the only guys that have this all under one roof. And so, itis a very seamless experience. As you may know, you know, iTunes was rated the best digital music jukebox in the world by USA Today, the New York Times, the Wall Street Journal, Fortune and Time Magazine.

The iTunes Music Store, you know, has a 70 percent market share of legal downloads of singles and albums, and as we talked about, the iPod is, you know, the most popular portable music player in the world, so having all these three things all best of breed and all working seamlessly together for the user, thatis a pretty powerful combination and no one else has it.

Peter Brennan: OK. Thank you.

Katie Cotton: Thanks, Peter.

Operator: And weill move on to Mike Wendland with the Detroit Free Press.

Mike Wendland: Hello, Steve.

Steve Jobs: Howdy.

Mike Wendland: Happy anniversary. The iPod has just changed everything. The question now is whatis next for us? So how about full color video, color screen? Do you ever see it morphing into anything like an iPhone all purpose device?

Steve Jobs: You know, our next big step is we want it to make toast. I want to brown my bagels when Iim listening to my music. And weire toying, you know, weire toying with refrigeration, too.

Mike Wendland: Not bad. Where is it going? What are you doing? Is it going to stay strictly music or will there be other features that you do?

Steve Jobs: You know, one of the things that I say around Apple, I paraphrase Bill Clinton when he was running long ago when he said, "Itis the economy, stupid." I say, "Itis the music, stupid." We have to stay focused on the fact that people are buying these devices to listen to music. People love music. They love listening to music as a background activity when theyire doing..when theyire exercising, when they are commuting and when they are just hanging out, and music is a wonderful thing because: A, itis music; and B, because it can be listened to as a background activity. And a lot of these other things that people are talking about building in such as video and things like that are foreground activities. You canit drive a car when youire watching a movie. You know? Itis really hard doing that.

So, we really are very focused on music because thatis what we think, thatis where we think the revolution is here.

Mike Wendland: All right.

Katie Cotton: Thanks, Mike. Weire going to take two more questions.

Operator: And our next question weill take is from Arik Hesseldahl with

Arik Hesseldahl: Hi, Steve. Always concerned about -- not concerned, I guess, but wondering -- one of the previous questions was about revenue. Iim wondering if iTunes has reached the break even point yet.

Steve Jobs: Yes. The iTunes music store had a small profit this past quarter.

Arik Hesseldahl: Had a small profit. OK. Any interest whatsoever, since in the open source OGG Vorbis format?

Steve Jobs: Weire certainly not getting any requests from customers for it.

Arik Hesseldahl: OK. And kind of a personal question here. Iive always been really interested in the development of the library, any songs that you personally really want that you donit have yet?

Steve Jobs: Sure.

Arik Hesseldahl: Can you name them?

Steve Jobs: ((inaudible)).

Arik Hesseldahl: Whatis that?

Steve Jobs: Weire working on them.

Arik Hesseldahl: OK. OK. Very good. Thatis enough for my questions. Thanks.

Katie Cotton: Thanks, Arik. And now weire going to take the last question.

Operator: And our last question will come from Ina Fried with CNET.

Ina Fried: Hi, Steve. Thanks for taking the question. I guess kind of one of the things Iim curious on as what you see as kind of the next inhibitors or the next hurdles to broaden the market for purchase download music. I mean, you guys set a goal of 100 million and it seems like you may have not quite reached that, not because Apple got, you know, pushed out by competition. You guys have dominant market share, but because the market just didnit grow fast. And Iim curious what some of the things are that you guys see as limits to why people donit download music.

Steve Jobs: Well, you know, we think the market is growing really fast. Zero to 70 million in one year, you know, if a year ago anyone had predicted that iTunes would sell 70 million songs during its first year, they would have been laughed out of town. Right? Donit you think? As a matter of fact, you guys would have done a lot of laughing at that.

So, you know, one year later here we are at 70 million songs sold and weire selling songs at the rate of 140 million songs per year. Right? We havenit sold that many yet, but thatis the rate that weire selling them at, 2.7 million songs per week, which equals the rate of 140 million songs a year, so weire pretty excited about this and we think itis, you know, zero to 70 million in six seconds isnit so bad. So, weire pretty...weire pretty optimistic.

Ina Fried: Iim just curious if you see things that will sort of accelerate that towards...or will it be kind of a steady growth in terms of, you know, predominantly while itis going fast predominantly, you know, people still buy CDs or, you know, thereis still a lot of free file swapping going on. Iim curious if there are things that might accelerate that or might change it from your perspective.

Steve Jobs: Well, again, I think the growth rate in the first year has been phenomenal and so, you know, weire just...weive got our seatbelts on.

Ina Fried: Great.

Katie Cotton: Thanks, Ina. With that weire actually going to wrap up our call. If members of the press have additional questions, they can call Natalie Sequeira at [deleted]. And thanks, everyone, for joining us today.

Operator: And that will conclude todayis conference call. Thank you for your participation, and you may now disconnect..