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iTunes, iPod stifling digital music?

updated 04:05 pm EDT, Mon April 17, 2006

Future of online music

Despite the tremendous growth of digital music, prices must increase if companies want to make money selling music, according to analysts. A new report says that the $0.99 price point --over which the labels have been fighting with Apple -- is simply not profitable, given the margins, the dominance of Apple's iTunes in digital music sales, and the tremendous popularity of the iPod. Even Apple, which sells millions of song and owns more than 80 percent of the US digital music market, is only marginally profitable at best, according to a report by TheStreet.com. "It's a long-haul business right now," says Aram Sinnreich, managing partner of Radar Research, a Los Angeles-based consulting firm told the publication. "It will be at least three years before anyone can make a serious profit selling digital music," largely because of the hold that Apple has on the market. Despite a rapidly growing market, the future of pure-play music services is in jeopardy because of market economics.

The report says that digital music market grew by 275 percent in 2005 to just over $500 million and that customers spent additional $150 million or so on music subscription services.

Sinnreich said that the iPod may be holding the industry, especially subscription-based stores, back because of compatibility issues with non-Apple music services. "The iPod's success is holding back subscription services "to a tremendous degree at this point," according to the analyst.

Music sales, the report argues, will likely not be a primary revenue source; instead companies such as Apple and mobile carriers will use music revenues to boost revenues and add new streams of revenue.

"If history is any guide, the only people that make money [in music] are the [music] labels," according one anlayst quoted by TheStreet.com.




by MacNN Staff

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  1. grossph

    Joined: Dec 1969

    0

    Dumb!!

    So because apple doesn't provide subscription based service it is holding back the industry , that they themselves said grew 275 percent. Maybe it is because the user does not want a subscription service where they rent instead of own...

    Analyst really need to think before they write. Maybe apple should be thanked for growning the market 275 percent.

  1. fletcher

    Joined: Dec 1969

    0

    Backwards

    This argument is backwards. Low prices and individual song sales are the reasons why the market is booming. Raising the prices may allow more companies to compete, but collectively they won't necessarily sell more songs than Apple is now. The rental services are charging way less than Apple is and still can barely compete.

  1. vasic

    Joined: Dec 1969

    0

    Nonsense!

    If you read the original article, these guys claim that subscription (or, more accurately, rental) model yields four times the margins of 'a la carte' services. In a paragraph before that, though, just one line above, they claim that iTMS is in the black (i.e. making profit), while all the rental models (Yahoo, Napster, Real, etc) are losing money big time. Which one of these statements is not true? 'Cause, both can't be, as they just contradict each other!

    If anyone with some basic math skills (ex. my 6-year old daughter) charts the progression in the number of iTMS downloads (or volume of sales) in order to figure out how much profit the industry will be making from downloads as opposed to CDs, it is clear that the trends are very steady and very positive. It won't take three years to make profits; they are already here (slim, admittedly); the three years will more likely be enough for that profit to become a significant portion of the pie (perhaps one-third?). If iTMS gets to be the only player, fine. If competitors slowly begin to figure it out, even better (both for the consumers and the industry). Apple/SJ are riding the wave. They are making the right moves. They have precisely figured it out and are (fortunately) rather successful at convincing those who are incapable of figuring it out (labels) that they are right. One thing annoys me here, though; in the end, labels will end up saving their collective arses on the vision of Apple/SJ. If it were them, the downloads would still be from P2P only.

  1. wymer100

    Joined: Dec 1969

    0

    Record labels

    Why is Apple the villan here? Apple is the one who opened up this market and showing the record companies that $0.99 is a good price to offer songs. Most people that I know are willing to buy songs for $2-3 per song. It's just not worth it.

    Really, the only viable option would be to lower the royalities to the record labels since they have basically no distribution costs. That would increase profit margins for song distribution companies.

    People do have options for music subcription services. People don't want to rent their music so it's not successful. Don't blame Apple for that. If subscription services were popular, then Apple could easily offer one.

    Apple is the only one making money (slightly) because it's the only one that has a viable business strategy. Apple is using the music downloads (low margin) as a way for people entice people to buy iPods (high margin). No other service works that way so no one is making money.

    Don't blame Apple for this. The competition just needs to make a better iPod. Making people pay $2-3 per song probably isn't going to be a popular option.

  1. ScottEllsworth

    Joined: Dec 1969

    0

    Nonsense

    This argument does not make much sense to me. With the ITMS, the labels do not have to produce shiny silver discs, transport them, and support a large record store. (And with a regular record store, they do not have to rip the music.)

    Thus, the costs are just plain lower. Further, the marketing efforts can move much more quickly - once you have a song staged to the server, it makes no difference whether one or one million people download it. The costs are the same. Thus, new songs have a different model.

    Then look at the back catalog. Older songs require the digitize and stage effort just once. They can then generate a small but credible revenue stream.

    What we are really seeing is the music industry realizing that electronic downloads are not going to be the 'CD of the new century', that motivates consumers to re-buy all their content. They thus need to trim their operations of expenses that do not advance the cause of generating, marketing, and actually selling music.

    To me, this can only be good, because it does open the world up for small payments to older or niche artists, which classically have gotten no payments at all. Look at a concrete example - ten thousand sales of an album is usually considered a flop, even though the label would get about 80k from it.

    Were that same set of sales to take place on the ITMS, though, the label would have had to risk less. Promotion costs are the same, but there is no inventory, no silver discs to warehouse and write off at the end of the year, and no shelf space being burned. That 80k revenue stream might be a small success, and further, if the band takes their (miniscule) cut of that, they might write another album, and end up with both at a higher profit.

    The labels really need to read Tim OReilly's thoughts on the Long Tail that micropayments and (nearly) free inventory make possible. They also might want to give both artists and songwriters enough of the pie to keep going - most of them still have not been given even the small amount that the LOC authorized for them, due to the costs of making CDs back in the 80s.

    I have sympathy - it is a rough life, but that is the business they are in. Labels need to be bold, taking advantage of the new opportunities technology has brought, without killing the golden goose that just might save them.

    The 80s are not coming back - floods of money are not going to enter the business. The iPod and ITMS have brought a new generation to music, with a new way of marketing, and new revenue streams. This can hardly be thought of as 'stifling digital music'.

    Scott

  1. dashiel

    Joined: Dec 1969

    0

    bs

    the way to profitability is to *lower* prices and increase quality. i've spent maybe $3 on music from itunes this year, but over $50 at allofmp3. why? because i can get lossless music for less than the 128kbps. for some i know that's not a big deal, but at allofmp3 i can get entire albums at 128kbps for the price of a couple of songs.

    if record companies ever got their heads out of their collective posteriors and released high-quality, cheap downloads the market would literally explode while at the same time all but eliminating casual piracy (the kind they seem to care about.)

  1. Person Man

    Joined: Dec 1969

    0

    Dashiel...

    Do you REALLY think that the music labels (or even the artists) are seeing ANY of the money you're paying allofmp3?

    That "service" is just as illegal as P2P, even though you're paying 10 cents a song.

  1. phillymjs

    Joined: Dec 1969

    0

    WTF?

    FTFA: "Even Apple, which sells millions of song and owns more than 80 percent of the US digital music market, is only marginally profitable at best, according to a report by TheStreet.com."

    Well, DUH! You would think a site about finance would understand the concept of a loss leader, but I guess not. The iTMS exists almost entirely to sell iPods, which *are* highly profitable. Any profit Apple manages to eke out after the record labels take their 2/3 of every sale is just icing on the iPod-profits cake.

    The only people unsatisfied with the way things are right now are the greedy RIAA b******* and Apple's competitors (though I don't know if "competitors" is an accurate term, since all they do is put out sub-par products and whine about Apple's success).

    ~Philly

  1. meltdww

    Joined:

    0

    are they serious?

    If you don't like iTunes, don't use it. iTunes in it's current form puts no limits on any previous music distribution. If you want to but CD"s from a traditional store, you are still free to so so. iTunes is just another (very successful, yet innovative) process to distribute music.

    I assume this is just more jealousy from folks late to the party.

  1. Fishtank22

    Joined: Dec 1969

    0

    totally rediculous!

    If record companies were selling CDs for $14-18ea with printing, duplication, and distribution costs. Selling an 8-12 song album for 99c per song would be way more profitable?

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