“The online music business is booming, but is anybody making real money at it? If you’re doing the actual selling of music — or music subscriptions — to consumers, the short-term answer appears to be not much. Competition, marketing expenses, a faulty business model, slow-changing consumer attitudes and the use by some companies of music as a lure to sell other goods and services have all conspired to keep the business largely in the red,” Troy Wolverton reports for TheStreet.com. “And that’s not likely to change anytime soon, no matter — or arguably because of — how many millions of songs Apple Computer sells through its iTunes music store, analysts say. ‘It’s a long-haul business right now,’ says Aram Sinnreich, managing partner of Radar Research, a Los Angeles-based consulting firm. ‘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.”
“The Recording Industry Association of America, for instance, estimates that the U.S. retail market for digital downloaded songs and albums grew to $503.6 million in 2005 from $183.4 million in 2004,” Wolverton reports. “At Apple in particular, iTunes revenue is becoming increasingly important to the company’s overall sales. The company groups iTunes song sales with sales of iPod accessories. In the first quarter, that unit tallied $491 million in revenue, or 8.5% of the company’s overall sales, up from $177 million, or 5% of the company’s sales, in the same period a year earlier. Apple has sold more than 1 billion songs through iTunes; citing data from Nielsen SoundScan, Apple CEO Steve Jobs has said that iTunes accounts for more than 80% of the total U.S. market for digital music sales.”
“While Apple says iTunes is operating in the black, financial analysts generally estimate that the store is marginally profitable at best,” Wolverton reports. “And even that performance seems to be a rare exception. Napster and RealNetworks, which operate rival online music services, are both losing considerable money each quarter. And few analysts think Yahoo!’s music service, which is charging a bargain basement price of $5 a month for a subscription, is operating in the black either… Selling downloads a la carte isn’t a profitable business, because for every 99-cent song (like Apple sells), stores have to pay the music labels 65 cents or more, according to analysts’ estimates. Add in marketing and technology costs, and the margins start to become very slim… The iPod’s success is holding back subscription services ‘to a tremendous degree at this point,’ Sinnreich says. But other analysts say that’s not all Apple’s fault. Even if selling songs one-by-one online isn’t great for music vendors, it’s the method consumers are most familiar and comfortable with. Apple has made much of the idea that iTunes allows consumers to own, not rent, music, and that message has resonated with consumers who for years have been buying CDs and, before that, LPs and tapes.”
Full article here.
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Related articles:
Napster to shift focus from subscriptions to ad-based business model – March 27, 2006
Apple’s iTunes+iPod market dominance underscored with more than 1 billion songs sold – February 24, 2006
Apple’s iTunes Music Store hits one billion songs sold milestone – February 23, 2006
EMI Music Chairman: Music subscription services like Napster and Rhapsody haven’t beeen huge – January 23, 2006
Apple’s roadkill whine in unison: ‘incompatibility is slowing growth of digital music’ – August 13, 2005
Analyst: Apple will lose market share to subscription services, fact that iTunes is tied to iPod – May 17, 2005
Study shows Apple iTunes Music Store pay-per-download model preferred over subscription service – April 11, 2005
Let’s see: sub services not doing well. Apple’s song ownership service doing okay. Ergo, A is caused by B. Um, well, yeah, in a competitive market economy, one person’s success might come in part at the expense of another’s person’s failure. Where were these “rocket economists” when Microsnot was “holding back” Apple?
Hey MDN: Keeping the world safe from Consutants (sic)?????
What a bunch of crap. Subscription services aren’t ‘failing’ because of iTunes success. Very few people were using these services even before the dawn of the iTMS. Those services have to put warped half-truths into their marketing propeganda now just to keep what few subscribers they have.
oh wahhhhh
Windows dominince holding back innovation, culture, genius, knowledge, and so much more.
Who will be next to board up the shop?
iTMS grinding them down in a grueling war of attrition. The others are getting reamed, and shareholders wont stand for it much longer.
This moron fails to see that the “consumers” are benefitting from this. The consumers are “saving” money.
Subscription will take the money from consumers and give it to the people who operate it; and at the end of the month, the operator has the money and the consumer doesn’t have the songs.
Why should it be always that the operator makes money?
I must argue that the iTMS is “holding back” the success of subscription services. Yes, iTunes is doing well while Napster et al are suffering, but I don’t believe there’s a causal relationship.
iTunes does well because it’s a good service. 99¢ is well worth the convenience of getting the song I want in a couple clicks, as opposed to wading through the p2p networks to get it. Once I have the song, I can do what I want with it — listen to it on most of my computers (only the Linux and really vintage Macs won’t play it — small loss), burn a CD and listen in my car, put it on my iPod and listen to it anywhere.
Napster & co. do poorly because it’s not a good service – I can’t burn a CD. I can’t play the song at work or in my car. If I don’t want to pay $x a month any more, I lose my music collection.
Indeed, brothers and sisters, the subscription services are failing not because of Apple, but because the services themselves not what the consumer wants. Thanks again, to the wisdom of the consumer.
Holding subscriptions back from what? Holding them back from more people discovering what a sham it is?
Apple’s refusal to do subscriptions (with the current conditions) is evidence of Apple taking the side of the consumer. As the article itself states, the main benefit of subscriptions is to put more money in the pockets of the “business” owner.
Apple may decide to do music subscriptions as part of a package when it starts carrying movies. If Apple does so, the Napsters of the world will surely get clobbered, as what little market there is for subscriptions will shift over to Apple and the iPod, so they better be careful what they whine for.
Steve Jobs put it best when asked about the iPod: “We’re offering choices to consumers. Our competitors don’t like the choices consumers are making.”
That’s some fine pwn3ge there.
What’s holding back subscription services is the business model itself: it sucks, pure and and simple. Apple has it right with iTunes and the iTMS, and people like this guy are forced to shill for scraps.
iTMS is a loss leader for iPods, plain and simple. Selling music which margins are so slim is just plain stupid all by itself. But some companies like Real do it hoping to make a few hundred grand anyway.
Subscriptions are the low margin area of online music sales, they cater to the thieves who rip the music off the sound card or by analog methods. Once they have gotten their fill, they are gone or trading with others, not paying one cent more.
Artists shouldn’t like subscription services one bit, it generates just about nothing for them. Apple is smart to keep iTMS a paid service and since they need their profits from iPod sales, there is a DRM lock-in.
Apple has hit upon the correct strategy, plain and simple.
There must be some financial data not generally available here. After pay-outs to the record companies, Apple is left with 34 cents to cover expenses. One billion times .34 is $340,000,000 pre-tax, and counting. And iTunes is only marginally profitable? Sure there’s salaries, up front costs for additional hardware, and depreciation on that over maybe 5 years, and taxes. And there’d be allocated expenses from corporate.
But marginal? Somehow I doubt it, even if Apple’s goal for now is just to “grow the market”. If any body can shed additional light on this, please do.
I think Apple knows what they are doing.
can you even imagine anyone putting $5k on a windows pc anymore? Thats how much we were paying for PCs back in 1999.
And this is “NEWS” how?
I’m gonna start a new CLOTHING company based on a subscrption model. You can get all the clothes you want for $50 a month.
If you miss, a payment or cancel your account you have to give your clothes back and walk around naked.
hey ‘jay’, it goes like this, not even counting operating costs, Apple wholeheartedly deserves every cent they make for keeping – record labels – consumers – artists – and themselves happy, all simultaneously.
Especially in a world full of half-ass products and services which offer most consumers no real value for their money (eg. subscription services).
MDN magic word : ‘real’ as in ‘that’s keeping it real’
Actually you can make a good case that Apple is “holding back” the success of subscription music model. Like so:
1. People download music to listen on a digital audio player;
2. The Apple iPod is the market leading digital audio player;
3. No subscription service is compatible with the iPod;
4. Therefore, any subscription music model is selling to margins – the 10-20-30% of people who own a DAP but not an iPod. And only those people who have a late model DAP compatible with the “subscription” DRM controls.
5. Also therefore – no subscription service is going to achieve “iTMS-like” market penetration unless it too is compatible with the iPod. (read “iTMS Subscription Service”)
…because for every 99-cent song (like Apple sells), stores have to pay the music labels 65 cents or more, according to analysts’ estimates. Add in marketing and technology costs, and the margins start to become very slim…
how would the subscription services be any more profitable? Their marketing and technology (bandwidth and storage) would be just as high. At least Apple’s business model makes money per song. With the Napster model after a certain amount of bandwidth the profit has to erode.
If every subscriber listens for 2 hours or 4 hours a day they have to feel a financial pinch.
Thought I’d mention emusic.com. They are a “subscription service”, mostly for indie music, but you indeed download and own the mp3 files and can do whatever you want with them, burn cds, put the songs on your iPod. This is legal too, not one of those russian mafia sites where each song costs three cents.
I pay $20 a month for 90 song downloads, I’ve been using emusic for years and I love it. It’s better, in my opinion, than the iTunes music store, and more affordable, but of course you’re not going to get Top 40 songs like with iTunes. Between iTunes and emusic my iPod is never lonely.
If you click on the link and then read the whole article, when you get to page three there’s a fascinating comment.
“Chris Gorog, Napster’s CEO, estimates that the margins for subscription services are “four times” greater than those for individual downloads.”
His own comment ought to give Gorog a clue as to why subscription services aren’t taking off. They are charging far too much for what they offer. They are also remarkably coy about what percentage of their fee gets paid to the labels and artists. I have no doubt that the figure will be substantially below 65%.
So what Gorog and the others are trying to sell is a service where they rip off the customers by four times as much as Apple, they rip off the labels by an undisclosed degree compared to Apple and when customers get wise to how bad the deal is, they leave and have nothing to show for it.
It’s not Apple that’s holding back subscription services. Subscription services are being held back because they are poor value for money. But if they now reduce their prices, they will only end up losing money at a greater rate. It’s their own fault for devising a pricing model that’s unrealistic and they are condemning themselves to burning money until such time as the business folds.
One of the things that comes through in the article (as supported by Gorog’s statement noted above), is that interested parties want subscription services to take off because that is where the profits are.
If you are Napster, an analyst, an investor that listend to the analysts, the content provider, you have an interest in subscription services taking off.
They are frustrated not by the fact that consumers are or are not getting what they want, but by the fact that their profit margins could be bigger if goddamn Apple hadn’t given consumers the first system that made sense.
“”The online music business is booming, but is anybody making real money at it?”
The content providers? Their margins here have to be OK, though they see getting 4x as much and start to salivate. These are the same fuckers that are dying to increase the prices at iTMS (if you really think variable pricing will actually lower the price on any but the worst, most unwanted tracks, I have some Iraqi WMDs to sell you).
I think Apple is more profitable then any of the others out in the world. For one it has only 1 or 2 people running the whole server operation versus a lot more for those others running PC servers. Next since Apple has 80% of the market it is making more on volume than any of the others. Subscriptions don’t work and that’s why Apple isn’t going to do them. My own opinion on subcriptions is that there more expensive and a pain in the butt for users who have to pay a monthly fee and check in or the music becomes useless. Not to mention more fees if you want to burn a CD or transfer the music to a player. The way iTunes works you pay once and that’s it your done. It’s just easy and it works and that’s what people want.
The market has shown that it thinks subscription services suck, or they would outperform iTunes.