The Apple of Music Lovers’ Eyes
By George Anderson
It was always more a question of when than if Apple’s iTunes Music Store would become one of the top retailers of music in the U.S. Now that it has cracked the top 10 (it stands at number seven), the question remaining is how much higher can it go?
“The ongoing and growing popularity of Apple’s iTunes Music Store now positions the company as a leading music retailer, and continues to legitimize legal digital music retailing,” said Russ Crupnick, music and movies industry analyst for The NPD Group. “With the growing interest in digital music, forecasts of more iPod demand this holiday, plus the stocking-stuffer appeal of iTunes gift cards, we can expect Apple to increase its share even more by year’s end.”
According to The NPD Group’s research, Apple is now selling as many units as the largely brick and mortar Tower Records and more than the Sam Goody chain. Wal-Mart, Best Buy,
Target and Amazon.com, FYE and Circuit City are currently ahead of Apple in the pre-recorded music category.
Moderator’s Comment: What does the growing prominence of Apple’s iTunes Music Store mean in the music retailing space? –
George Anderson – Moderator
Probably the biggest thing “Brick and Mortar” retailers must lookout for is the spill-over effect of the iPod. You have a whole new generation of consumers who are geared to “instant gratification” as they immediately download their tunes. On one hand, this means they are going to be much more comfortable going online to order whatever they want. On the other hand, they might be more likely to go pick it up in the store so they don’t have to wait for the delivery. The smart retailers will be the ones who figure out a way to meet both these requirements and attract the online shopper to their local store.
I’ve been incorrectly predicting a price war among legal music downloaders for over a year. I always thought that 99¢ would not remain stable, and that we’d soon see 89¢ and lower. Wrong so far, but the industry is still finding its legs. A major part of each 99¢ download goes, appropriately, to the artist/music publisher. As volume increases and restrictions against illegal downloads grow stronger (good luck with that one), I still believe that the artists and music publishers will begin to understand price elasticity and experiment with lower margins and higher volumes.
It’s going to be interesting to see how the recent launch of MySpace Records helps or hurts iTunes. As the number 4 Web domain (behind only Yahoo, eBay, and MSN and AHEAD of Google and Yahoo), MySpace is set to become a music marketing monster in short order and any subsequent alliances they form will move the music delivery needle!
There’s little doubt that digital downloads are here to stay and will continue to play an important roll in the distribution of music, movies and other forms of entertainment. While I love my iPod and the ability to buy music from the folks at Apple, the experience doesn’t compare with the experience of shopping for music in a retail store.
I grew up in the same neighborhood as the first Tower Records in Sacramento, California where the selection included music you couldn’t find elsewhere. Unlike what you find at Wal-Mart and other mass merchants, Tower stores continues to offer a massive selection of music much of which is not available elsewhere.
In San Francisco and Los Angeles independent music retailer Amoeba Music has two huge stores offering a wide range of new and used CDs from the big name artists as well as unknowns. I hope we never see the day when you can’t go to a retail store like Tower or Amoeba to listen to and buy music.
I agree with the comments here. Apple appears to have done a much better job of capturing and using real consumer data during the development of their technologies and products, iPod and iTunes being just two of many examples. Our study of Apple and Microsoft turned up a sharp difference between the two companies as to how they processed fundamental market, consumer, and user information: Apple, though not perfect, ranks much higher on openness to finding and using information that contradicts executives’ ideas and established strategies. I believe (without data to support my claim) that the current configuration of iTunes will not be the last, and that iTunes will soon be followed (within two years) by a new product channel from Apple that will further alter the retail space significantly.
Digital delivery of entertainment content is the most important trend facing entertainment retailers. Those retailers dependent upon existing delivery mechanisms (prepackaged CD’s) must either redefine their mission of face an inevitable erosion in volume, profit, and market share.
Prepackaged (commodity) product carries less margin than customized. Look to any industry, any niche, and this holds true. At $.99 per song, a 15 title download from iTunes costs almost $15. The prevailing price for an 18 title prepackaged CD is $11.99. Further, the delivery cost is almost nil compared to the production cost of the CD.
My belief is that digital delivery of music will rapidly become the dominant mechanism for selling product. Bricks and mortar establishments have a role. Take a step back, and analyze which segment of the market you can serve best, what features and benefits that segment will pay for, and redefine both your merchandise mix and your in-store experience.
This is a wake up call for traditional music retailers.
iTunes will have more than just an impact on retailing. I predict it will have an impact on broadcasting and publishing, to name just two media.
Podcasting is already becoming an influence in the radio space. It is predicted to become a meaningful portion of the radio audience somewhere between 2008 and 2010. Also, authors and publishers are beginning to recognize iTunes as a place to distribute the spoken version of the written word.
And I haven’t even touched on video iPods. Just like Amazon is more than a book store, and Google is more than a search engine, I think iTunes is destined to be more than a music retailer. It’s a new broadcast medium.
Legal downloads will exceed CD sales. It’s only a question of time. The 2 legal download models (pay by the tune or pay by the month) are still battling, and both may survive. CD’s or another physical equivalent may also survive. But it appears that nonpaid file sharing (whether illegal or not) and illegal CD copying are much larger than their paid counterparts. The music industry hasn’t found a truly effective carrot/stick formula to beat the nonpaying customers. Intimidation via copyright lawsuits, CD seizures, and technology-driven copy restrictions have some effect, but millions of people still break the copyrights. The major gain versus the nonpayers has been from low-priced downloads, but “free” still trumps “cheap.” And if there are any legal consumers of music in China, my guess is that all of them could fit into a small Starbucks. The great sales opportunity for the music industry is to beat “free,” not to beat CD’s.