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iTunes Collapse: ORLY?

Engadget has an interesting headline today: "iTunes sales "collapsing," blanket licensing to succeed?"

It's (loosely) based on an analyst's report from Forrester. I haven't gotten a copy of the Forrester report yet, but this is the kind of thing that makes me not take blogs seriously. I don't think the Engadget reporter understood the Forrester research report he cites. (Or, rather. Fails to cite.) Or maybe he just read a summary of it. Either that or intentionally made it a lot more breathless.

  1. Apple's music sales, according to Forrester's sample, fell 65 percent in the first six months from the previous year. Not through December, through June.

  2. If the Engadget reporter had bothered to read past the headlines, he might have noticed that "Forrester, which based its findings on analysis of 2,791 U.S. iTunes debit and credit purchases, said it is too soon to tell whether the decline is seasonal or if demand for digital music is falling." That's a huge caveat. It's not accurate to write, as Engadget does, that "since January, the monthly revenue going into Apple's iTMS has fallen by '65-percent,' with the average transaction size falling '17-percent.'" You have to have that seasonal caveat in there or you're doing a disservice to your readers.

  3. That digital music won't save the record industry, or that there are only a few iTMS tracks per ipod, are hardly news. (I wrote the same story for Wired magazine in the Spring.) Even as Apple sells more and more digital music, the music industry makes less on it because they earn significantly less in annual revenue from digital than physical sales both because the cost per unit is lower and because people tend to max out at four downloads per album, several (more comprehensive) studies show. So, instead of a $16 sale, you get a $4 one. The Forrester report found the median sale was $2.97, which is still in that ballpark, but even lower, and probably about right as the "four track" figure takes p2p downloads into account. Even when free, the average music consumer today doesn't download an entire album. This is true of "concept" albums even.

  4. Apple's iTMS can, to a certain small extent, be sussed out. When you look at the company's quarterly financials, iTMS and iPod accessories are listed as "other music." In q4 2005 (quarter ending around October 15) that revenue was $265 million. In Q4 2006 it was $452 million. Now, while that might represent a fortune in revenue from the kickbacks it gets for every accessory sold with a "Made for iPod" logo, it seems unlikely there is a "collapse" going on or you would see it reflected more in the quarterly numbers. In Q3 2006 (which included the lasrt two months of the Forrester study) "other music" revenue was $457 million. In Q3 2005 it was $241. Q2 2006 (which includes three months of the study) was $485 million, and in Q2 2005 it was $216.

So, in any case, while there may be a year-to-year decline, or stagnation, in sales, I think the word "collapse" is probably an extreme characterization. Since Apple doesn't break out sales as much as analysts would like, there's a lot of tea leaf reading over it.

But you can say some things with certainty. It had sold zero songs at its launch in April 2003. In January 2005, it had sold 250,000,000 songs. In July '05 it was up to 500,000,000. And it took until January 06 to sell 1,000,000,000. By September, when Jobs rolled out iTunes 7, Apple had sold more than 1.5 billion songs. While that's a longer time frame to add those half-billion songs, it certainly does not seem to suggest an overall 65 percent decline. I'd be very surprised if those numbers hold up. Finally, furthermore in Apple's last quarterly conference call, it noted that it was doing better than breaking even on the iTMS sales, which likewise does not suggest a collapse.

Oh. And as for blanket licensing: if that's the case, then why is eMusic the number two online music retailer in terms of downloads, even without any major label artists? Consumers don't want DRM, and they want to own their music. While iTunes isn't perfect, it's certainly less odious than the Windows Media options.

Update And another Oh. The Engadget post states "Notably, it's not just Apple suffering the cashflow drought, as Nielsen Soundscan reports that the "industry as a whole" is steadily declining. Additionally, research has shown that the "median household" spent just "three dollars" about six times per year, showing that digital downloads aren't exactly "replacing the CD," but rather complimenting hardcopy sales at best." I'm not sure if they are indicating that the music industry as a whole is suffering (duh) which wouldn't really follow, or that the digital market is declining (which is what I think the post is trying to say). But in any case, The RIAA numbers for the first half of 2006 show not a decline, but an 86.6% increase in revenue from a year ago. $417.2 million for the first half of 2006, vs. $223.6 million for the first half of 2005. That does not include subscription or mobile services, both of which were also up, by 48.3% and 96.8% respectively. Subscription sales for the first half of '06 totaled $96.1 million for 1.9 million subscribers, and mobile was at $356.4 million on 144.3 million units (exceeding digital sales numbers for the first half of 2005).

Meanwhile, total physical sales were down 15 percent, to $4,066.0 million from $4,786.2 million. The overall market saw a 6.1 % decline, to $4,935.7 million from $5,255.7 million in 2005.

Update #2: Forrester is publicly disavowing the Register story (on which that Engadget post was based) while Apple broke it's typical silence on these matters to note that iTunes sales aren't tanking.

Nice analysis, Mat.

Here's my theory: the current products of the music industry (which iTunes resells) suck.

In the end, when an organization's sales decline, it means one thing: Consumers don't value the organization's products (fundamentally we buy when the product is worth ever-so-slightly more to us than the cash we lay out for it). Similarly, when an industry's sales decline, it's because the market doesn't value the industry's product. Maybe that's because there's a free alternative (stolen downloads), or maybe that's because consumers have had enough of highly-polished American Idol clones (not to mention the originals).

Me-self, I own an iPod, loaded with my CD collection, along with about 15 songs purchased from iTunes. Honestly, there's no unpaid downloads on it. Why so few downloads? I'd rather have the media. I know it will survive the transition to my next laptop or my next iPod.

But having said that, I've only bought three CDs in the last year; Pink Floyd's "Wish You Were Here", Pink Floyd's "The Wall", and Johnny Cash's Greatest Hits.

Maybe I'm just an old fart, but most of the top forty just isn't calling to me. And maybe it isn't calling to enough other people either. And as much as the industry wants to blame digital media, perhaps they need to face the fact that consumers just plain don't see the value in the product.

The real decline in music sales, and the reason that song downloads won't help, is that the industry has been running for years on the back of media replacement. Far more sales went to trading up from LPs to 8-tracks or cassettes than to new artists. But with CDs, the music industry cut its own throat by producing a digital medium that was more than good enough for consumers (no reason to upgrade to SACD/whatever audio DVD format they decide on) and could be easily translated into another medium without a new purchase.

In other words, what's killing the music industry isn't Kazaa or Limewire. It's that people don't have to buy new copies to keep listening to their old music. The CD of the Beatles that you bought 20 years ago probably plays just as well today as it did then, and you can rip it to your iPod for free rather than paying to download it again. (And at the quality/size ratio that you like.)

If the industry wants to blame anyone, it should start with itself for making a product without planned obsolescence.

I think the real news here is that sales are declining at all. I think you might have some early adopters jumping ship. I can only speak to my own experience, but after spending about $30/mo. on iTunes for a year or two, I switched to eMusic, which doesn't have as good a selection but is a) cheaper and b) DRM-free. I told myself the iTunes DRM was ok at first, but as I built up a library I started wondering how I was going to be able to keep using it over time - particularly as iTunes has gotten larger and more bloated (at least for Windows - iTunes 7 is a lot larger and resource intensive than iTunes 5 was when the iTunes store opened for Windows). I still make the occasional purchase on iTunes (the immediacy is great) but I'm way down from the amount I was spending at first.

Isn't this the first year in a while that there hasn't been a huge Pepsi/iTunes promotion?

I wonder how many songs Pepsi bought the last couple of years.

I prefer iTunes to eMusic for one reason: the format. I prefer to buy my own CDs (or rip them from friends), but when it comes to purchasing music online I'd much rather buy from iTunes because AAC just sounds better to me. MP3s sound horrible to my ears, even at very high bitrates.

I wish the AAC/iTunes/iPod link would be broken. I think AAC is the best compression format, but it's only really available on iTunes and iPod players.

I've ripped my entire CD collection to 192kbps AAC VBR.



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