“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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