“It is a different world in the music industry now – the record companies, old-style CD retailers and everyone else who has ever made a cent in the music business had better be braced for more change,” Cody Willard reports for The Financial Times. “There will be no more bundling of 10 bad songs with a couple of good singles to squeeze $15 out of consumers for a CD. Wal-Mart and Circuit City are not going to be able to depend on CD sales driving foot traffic in their stores. That is just the tip of the iceberg. Perhaps most crucially, Apple is set to become a huge force in the music business.”
“Apple has firmly established itself as the leader in this new music revolution, and it has its sights set on displacing Wal-Mart as the world’s largest music distributor. The company is setting up barriers to entry by keeping its digital music platform proprietary and, thus, incompatible with other systems,” Willard writes. “Many analysts and pundits claim that Apple will suffer the same fate with its closed systems as it did in the computer business, when the company allowed Microsoft to gain critical mass. That is the gamble in this high-stakes game of controlling the next generation of music distribution.”
Willard writes, “But as it stands now, Apple has myself and tens of millions of other iTunes users all but locked in. Even if Microsoft comes up with a better system and Sony some day figures out how to design a decent MP3 Walkman, I will not be switching from Apple. I cannot, because those songs I purchased on iTunes can only be played on my iPod. The switching costs are too high now. It is that way for most iTunes and iPod users.”
“Wal-Mart’s $5bn a year in album sales currently accounts for nearly 20 per cent of all albums sold. The operative word in that sentence is ‘currently.’ With total iPod sales expected to hit the 50m mark by the end of 2006, you can extrapolate another $100 per iPod in revenue for iTunes (the equivalent of only six CDs over the lifetime of the iPod), which would entail $5bn in sales for Apple over the next few years,” Willard writes. “Frankly, it is probably more reasonable to assume $500 (the equivalent of 35-40 CD purchases) in iTunes revenue every three or four years for every two or three iPods sold. That estimate would put the expected sales at iTunes up to $10bn-$15bn in the next few years.”
Full article here.
Cody Willard is a hedge fund manager at CL Willard Partners. He’s right that Apple is set to become a huge force in the music business, possibly the hugest force. However, he’s completely wrong that Apple is incompatible with other systems. Apple offers the only cross-platform music jukebox application and online music store for both Mac and Windows. All of the other also-ran online outfits offer tracks encoded in Microsoft’s proprietary Windows Media format. They exclude millions of Mac users completely. Songs purchased from iTunes are not playable only on an iPod. In fact, you don’t even need an iPod. Users can play them on their Macs and Windows PCs and also burn CDs that can play in cars, home stereos, portable CD players, boom boxes, etc.
Apple will not “suffer the same fate with its closed systems as it did in the computer business.” The fate Apple is “suffering,” by the way, is to own the rapidly growing Mac platform which is simply the best personal computer platform in the world and also happens to sell in excess of well over 4 million units per year. Not a bad fate to suffer.
The Macintosh platform required and still requires huge investments by developers to create compatible software. The iPod simply plays music that can be encoded, for very little cost, in any format the “developers” (musicians and labels) desire: AAC, MP3, WMA, etc. The music doesn’t need to be rewritten, recorded, and remastered. It’s like writing Photoshop once and then pressing a button to translate it for use on Mac, Windows, Linux, etc. To draw an analogy between Mac OS licensing and the iPod/iTunes symbiotic relationship simply highlights the writer’s ignorance of the vast differences between the two business situations.
Related articles:
Apple’s roadkill whine in unison: ‘incompatibility is slowing growth of digital music’ – August 13, 2005
Enjoying Apple’s iTunes and iTunes Music Store without owning an iPod – May 11, 2005
The iPod is not the Mac, so stop trying to compare them – August 13, 2004
The de facto standard for legal digital online music files: Apple’s protected MPEG-4 Audio (.m4p) – December 15, 2004