itunes: Apple s Profitable Trojan horse

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iTunes: Apple’s Profitable Trojan horse

Nearly twenty billion music downloads and still growing. Apple Computer (www.apple.com) has nearly reached this landmark achievement of 20 billion downloads from their Apple iTunes online music store. iTunes has been a remarkable success, thanks in large part to the success of the Apple’s iPhone, iPad and the original iPod, the original super cool digital music jukeboxes. Now the computer maker makes over $1.8 billion per quarter from iTunes sales alone. The success of iTunes is altering the very foundations of the entertainment industry and has transformed the fortunes for Apple computer. Consumers have flocked in droves to the Internet, to download, both legally and illegally copyrighted music material. The digital music revolution has changed the way people listen, use and obtain their favourite music. Not only has it transformed music business, but that of all digital content.

The inspired launch of the iPod, a portable digital music jukebox, has turned out to be a stroke of genius and a huge revenue earner for the firm. When launched iTunes was seen as a nice complementary product for an Apple computer product range, now it has become an integral part of the company’s future. Its pioneering success lead Apple to enter the mobile phone and tablet market. Now Apple iTunes represents the future for the company transforming it from a computer maker to a global online retailer of digital content, transmitting music, software, film, TV, podcasts, books, and magazines. Much in the same way Sony became synonymous with the Walkman, so too has Apple with the iPhone, iPad and iTunes. This remarkable success has been achieved in 10 years with the initial iTunes store launched in 2003.

The emergence of MP3 players and in particular, the immensely popular Apple iPod transformed the music industry. These small handheld devices allow music lovers to download and play huge music libraries with ease that hold thousands of songs. Consumers are now downloading songs electronically from the Internet, and storing

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them on these digital devices or burning them onto rewritable CDs. The Apple iPod transformed the fortunes for the beleaguered computer maker. Now with iTunes embedded across all Apple devices, the company has created a strong multichannel distribution network for digital media content. It can retail content across its Mac computer range, iPhone devices, iPad tablets, iPod music players, and Apple TV streaming products.

iTunes allows users to manage their electronic media, including books, music, apps, games, movies, TV shows, podcasts, ringtones, and even lectures. Content can be synchronised across up to five multiple devices using Apple’s cloud computing. Users can manage playlists, utilise music discovery features like ‘Genius’, burn CDs, make backups, stream radio, and tweak music playback. The iTunes allows users to purchase content with one click. Now users have the option to buy DRM-Free songs and music videos, which allows them to get greater flexibility by allowing them to be used in non-Apple devices. As of January 2009, users can buy DRM free songs for an additional 30% extra. The company now has three price points 69cents, 99 cents, and $1.29cents for downloads. Now in its 11th iteration the store design has been simplified with greater cloud computing features, integration with Facebook/Twitter, and providing more pertinent content such as; where artist is touring. Its dominance in the sector is staggering. To put it into perspective the company shipped over 53.8 million units in one single quarter alone in 2012. In that one period, the company sold 26 million iPhones, 17 million iPads, 4 million Macs, and 6.8 million iPods. The only product the witnessed a decline was the iPod with a decline of 10% on sales the previous year. Interestingly over a third of product purchase downloads come from non-apple devices.

In October 2001, the late Steve Jobs, the founder and CEO of Apple computers, announced the launch of the first generation of iPods at the company’s Macworld conference, to self confessed Apple brand evangelists. The iPod offered people a “1,000 songs in your pocket” - a very brilliant, clear and succinct brand promise. Some commentators questioned Apple’s strategy and the iPod’s high unit price, whilst others saw the launch as a nice PR exercise for the firm. Both sceptical

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analysts and the firm itself could not have envisaged the spectacular ensuing success for the device. Almost instantly these portable digital jukeboxes were highly sought after, and achieved a “cool” kudos. The iPod became a “must-have” gadget for any self-respecting technophile. This early sales momentum transferred through onto the mainstream audience with subsequent newer versions, with higher capacities, and cheaper prices. Two years later, Apple launched iTunes music store creating a digital download powerhouse. Much of the success has been down to the simple and uniform pricing strategy, which has become an industry standard, 99 cents a track. Users could cherry pick their favourite songs from hundreds of thousands of online albums. Through the success of the iPod, Apple enjoyed a reversal of fortune, with the brand enjoying the benefits of the “halo effect”. Consumers who were buying the sought after iPods, were now considering other Apple products due to their positive experiences.

Apple iTunes was originally just the software interface programme that allowed iPod users to manage their digital jukeboxes with their computers. It in fact became a “game changer”. Through this interface, users could play and organise digital music content on their computer and digital music device. Users could create their favourite music playlists, manage their music library, copy files, edit information, and record songs from their record collection onto a digital format. Through this store, users were able to download and access a huge catalogue of legitimate digital copyrighted material that could be played for an unlimited period on their computer and iPod. Greater adoption of high-speed broadband access allowed for an increasing number of Internet users to download their favourite song or album via this mechanism. The killer feature with the iTunes music store format was that a song could be bought for as little as 99 cents a track a revolutionary concept for the recording industry. Now users could pick and chose their favourite songs. Also iTunes was compatible with Windows based PCs also, rather than just Apple computers, giving it a wider audience. Not only does the iTunes site cater for music lovers, Internet users can also download audiobooks and podcasts. Podcasts are a method of transmitting digital files through free or paid subscription. For example, a radio station could podcast a popular show on the Internet, which can be

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downloaded by a surfer, and played back at a later time on a digital device. There are thousands of both professional and amateur podcasts created daily.

Following the initial success, Apple iTunes is now available in over 63 different countries including most of the EU, North America, Australia and Japan. All of the different stores are adapted to take into account local music preferences and tastes. For example, the country specific store would have their own Top 100 chart for that particular country and showcase indigenous artists. The US version of iTunes is the standard bearer of the service, offering more advanced features, such as TV episode downloads. Now TV and film download streaming services are being rolled across the different countries that iTunes is present. Although iTunes has near monopoly status, it still faces heavy competition, and large threats loom on the horizon. Many competitors have been vanquished in trying to compete against the ubiquity of iTunes, including Sony’s Connect service, the Microsoft’s Zune marketplace, and the enfant terrible, Napster.

Table 1 – The Major Legitimate Competitors

Name Details Pricing

Apple iTunes

Multinational Presence. Huge presence in Film, Television, Apps, Books, and Podcasts.

No subscription

Downloading $1.29 a track

Amazon MP3

The online giant has over 20 million songs available that can be played across several devices including Apple products. One of its biggest features is the availability of

Amazon’s powerful cloud computing

infrastructure, that enables users to listen to their music collections across devices.

No subscription

Rhapsody This is a subscription service, with over a million members, a back catalogue of 16 million songs, and cross platform

Subscription service $9.99- $14.99 a month

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functionality. Largest subscriber base.

Spotify Subscription music service with 18 million tracks Available in 13 countries with 10 million active users, with 3 million paying customers.

Free – £9.99 subscription service. Free service is ad supported.

Google Play

This is Google’s digital multimedia distribution service, selling books, apps, movies, games and magazines. This is Google’s direct competitor against Apple and its iTunes platform. Allows users to upload 20,000 to their cloud computing service. At present weaker product catalogue than iTunes or Amazon.

In the wake of digital music revolution, a plethora of other music download sites and software have emerged. A large number of legal download sites have been launched, where surfers can either stream their favourite music or download them for future use in their digital music libraries. The rise in digital music sales, which now accounts for over 32% of total record sales, has counteracted the continued decline in sales in music discs. Downloading has now overtaken the singles market. À-la-carte download services and subscription-based services are the two main business models. Highlighting this growing phenomenon of the net as an official channel of distribution, music charts are now being created such as the “Official Download” chart. The music industry is hoping that a dominant digital format, an industry standard emerges. Online music was worth $5.2 billion in 2011. More and more revenue is being garnered from online single sales, for example Bruno Mars’ single “Just the way you are” sold 12.5 million digital copies. Digital album sales increased 13.8% in 2012. The growth is expected to continue with increased broadband Internet speeds; more digital music devices including phones, and more digital music download providers. Growth in legal downloading is now exceeding

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illegal downloading. Record companies are now harnessing the capability of the Internet rather than fearing it and illegal downloading.

Record companies are now harnessing the capability of the Internet rather than fearing it and illegal downloading. There are still numerous illegal downloading activity on the Internet through Torrent sites, Peer to Peer Sharing sites, and File Hosting sites. One industry commentator estimated that the loss to the UK industry was a conservative £180 million in 2008 alone. The “Free” economy of the Internet has led to interesting pricing models being introduced like UK group Radiohead offering their latest album for free, where downloaders could pay what they like (62% did not pay for the content). Several wannabes have totally failed in their quest to usurp Apple iTunes, for example Sony’s Connect, Microsoft’s Urge, Coca Cola’s mycokemusic.com, Dell, and Easy Group. They have all failed despite pouring millions into these services. Why has iTunes popularity been so hard to beat?

Now iTunes offers users the opportunity to download video content such as their favourite television shows, movie trailers and music videos. In partnership with several television studios, users could download an entire episode of their favourite programme in its entirety, 24 hours after it is was aired on network television. This represents another viable revenue opportunity for the firm, and should prove to be an interesting proposition in that will users be willing to pay to view television episodes which are free to air on television? Now Apple is in talks with movie studios in a bid to use iTunes as a platform for releasing and distributing movies. It already has competition within this sector, with the going rate for movie downloads ranging from $9.99 to $19.99 a movie. The major issues to be overcome are piracy protection, and pricing. Movie studios want higher prices, control over release windows, and possibly subscription charges. Competitors like Sony have seen their market share for portable devices being eroded, and they now want to reclaim this territory, as they are powerful content owners, owning a major Hollywood movie studio, and the second biggest record label in the world. They may veto such moves, in an attempt to boost greater share of the revenue. Some other major obstacles lay in wait such as speed of downloading movies, and storage capacity restrictions. Now

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many televisions are Internet enabled allowing for easier digital content dissemination. Many commentators see that iTunes has to easily accessible on televisions to maintain its current growth trajectory.

Probably the biggest area of concern for iTunes is the growing prominence of the music player enabled mobile phones. Mobile phones have become ubiquitous with 100% penetration rates in markets. Much in the same way they took a portion of the digital camera market, they too could become the dominant players of digital music rather than stand-alone players like the Apple iPod. More worryingly for Apple that as technology improves, there will be even greater integration between mobile phones and portable music devices, hence the sales decline of the iPod device. It is envisaged that consumers will only want one handheld device that will provide telephony, music and camera capabilities. Now the Smartphone Wars between Apple, and Google’s Android place added significance for iTunes future. Google is still way behind the iTunes in terms of revenue, despite both Google selling more Google Android smart phones. Google have rebranded their own digital content online marketplace, calling it Google Play. They are attempting to match iTunes retail model, pound for pound.

One of Apple’s main strengths is that they offer the customer a complete user-friendly listening experience, controlling both the hardware and the software. Music industry executives are alarmed that iTunes has such dominant market share. They want more flexible pricing structure rather than the standard 1.29c a download, for example charging premium prices for new hits, and lower prices for promotions. Apple argues their pricing structure encourages legal downloading of music, if prices are higher it encourages surfers to illegally download material. Music studios want a greater share of the spoils. Industry sources suggest that out of a typical UK download, the music label gets 61.5%, royalties account for 8%, leaving the online music store with just 15% of revenue. They want to have greater control over their digital sales channels, and they have a number of options open to them.

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For traditional music retailers, like HMV, the retailing landscape is getting more and more competitive with multiple channels of distribution emerging due to the Internet and large supermarket chains now selling music CDs. Supermarkets such as Tesco and Asda now sell a selection of the top selling albums. They view this market as quite lucrative due to the higher margins obtained rather than typical food items. Also due to their size and scale they can obtain heavy discounts from music publishers. Furthermore the Internet has given consumers greater choice. They now can buy albums from traditional Internet retailers such as Amazon.com, and also on websites that utilise access to grey markets, and now through legitimate download retailers. The music industry has truly evolved into a multi-channel world. Increasing numbers of people are going to source their music through the Internet and supermarkets, leaving traditional music retail operations a severe conundrum, how can they entice more shoppers into their stores. The likes of established retailers like Tesco have entered the download market also. Surfers can download tracks through their websites for 79p a download. Many question if HMV (the leading high street music retailer established in 1921) will survive the next decade, as its sales fell 20% in 2011.

The Internet has emerged as the primary channel of distribution for music and other entertainment content, and these industries are going to have to adapt to these changes. The move towards the online distribution of entertainment content is still in its infancy, with more investment into the telecommunications infrastructure such as greater Internet access, increased access to broadband technology, and changing the way people acquire music and entertainment will undoubtedly take time. Digital adoption will increasingly occur, especially with the colossal smartphone market. Apple through its iTunes and its range of integrated devices products wants to be at the forefront of this digital technology revolution, iTunes is the platform where all consumers’ entertainment content can be accessed through their site. Other competitors have different ideas, and will continue to threaten the long-term sustainability of iTunes, and its possible future success.

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Case Questions

Q. 1 - Discuss the how digital technologies are changing music and movie distribution, and how retailers are adapting.

Q. 2 - Critically appraise Apple iTunes strategy of now allowing DRM free downloads to work on Apple iPod devices.

Q.3 - Debate how should Apple respond to the Google’s new “Google Play” marketplace service? Furthermore recommend a course of action for the Apple, giving reasons for your answer.

from a variety of published sources.