Consultant: Apple iPod dominance holding back subscription services

“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

28 Comments

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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’

  7. 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”)

  8. …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.

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