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After The Download: When Apple Turns Off The iTunes Store

mark mulligan logo image 300This column by RAIN guest contributor Mark Mulligan, founder of Midia Research, was originally published on his Music Industry Blog.


When new formats race to the fore it is easy to make the mistake of taking an eye off the legacy formats. This is risky because they usually still account for very large portions of existing revenue. Now that the marketplace has finally accepted that streaming does in fact cannibalize download sales (indeed 27% of subscribers say they have stopped buying downloads) the attention has, understandably, simply shifted to figuring out how quickly streaming revenue will grow. At a macro level this is fine, in fact it even works at a big label and publisher level. But it is far more challenging for smaller labels and publishers, and also for artists and songwriters. Each of these constituencies still depends heavily on download sales. Of course the big labels and publishers do too, but their repertoire portfolios are so large that they can take the macro view. For the rest though, because the average royalty income per album per streaming user is just $0.21, download sales remain crucial to cash flow. So, what happens when the download dies?

The demise of legacy formats normally follows this pattern:

  1. An accelerated initial decline as early adopters abandon the technology in favour of the shiny new thing
  2. A steadier, slower, long term decline as the mainstream migrates away, leaving only the laggards
  3. A sudden death when the sales channel no longer supports the product (think black and white TVs, cassette decks, VHS recorders etc.)

The CD is clearly following this trend but phase 3 will be long in coming because it is so easy for Amazon to continue stocking product, especially super high end box sets etc. Meanwhile discount retailers, petrol stations, convenience stores etc. will continue to find space for super low end cheap catalogue CDs. For downloads though, there is likely to be a near-sudden halt within the next 5 years. Although Amazon has made solid inroads into the music download business, Apple remains by far the dominant player. Thus the music industry is in effect dependent on the strategic whims on one partner for one of its most important revenue streams.

Subscriptions Are Key To Apple’s Services Narrative

Apple has historically been in the music business for one reason, to help sell more devices. That’s why Steve Jobs was happy to accept a 65% label revenue share model that ensured it was nigh on impossible to run a digital music business as a profit making venture i.e. he wanted to lock the market into a commercial model that neutered the competitive marketplace. We’re still feeling the effects of that now, with that 65% benchmark being the reference point against which streaming rates have been set.

No new news there. But what is new, is that Apple is trying to pivot its business towards a services based model. Apple is building a Wall Street narrative around monetizing its existing user base. It needs that narrative because device sales are slowing. Until it gets another hit device that can grow another new-ish marketplace (VR anyone?) Apple needs to focus on driving extra revenue from its base of device users. This has much to do with why Apple chose to enter the streaming market now as did any other factor. While the download business generated solid headline revenue it did not have the benefit of being predictable, on going spend in the way that subscriptions are.

So music is now more important to Apple because it is the entry point for its services based business model. Eventually music will lose importance to video, and potentially games too if Apple can build a subscription business around that. But for now Apple will be looking to migrate as many of its iTunes customers as possible to subscriptions, whatever it might actually be saying to record labels!

download collapse

Turning Off The iTunes Store

And this is where the download collapse comes in. Last year downloads declined by 16% in nominal terms. This year they are tracking to decline by between 25% and 30%. If we trend that forwards there will only be a modest download business of around $600 million by 2019, down from a high of $3.9 billion in 2012. For Apple, if it continues to grow its subscription business at its current rate, hitting 20 million subscribers by end 2016 and around 28 by end 2017 etc, by 2020 its download business would be tracking to be 10 times smaller than streaming revenue but, crucially, streaming revenue would nearly have reached the 2012 iTunes Store download revenue peak. This is the point at which Apple would chose to turn off the iTunes Store. The narrative of services based music business would be complete.

Smaller labels, publishers, artists and songwriters all better have a Plan B in place before this transpires. The download was a fantastic transition product to give the music industry its first steps into the digital era. But as we transition from transactional models to consumption based ones, its role diminishes every passing year. It has served the market well, but the end is now in sight.

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8 Comments

  1. I doubt the downloads are going to go away that quickly. Their are still plenty of people out there who still want to put music on their iPods or burn CD’s of downloads for their cars.

    • I agree. There are still plenty of people who will want to own music, whether it be vinyl (yes, folks, those are still around) or a CD or an audio file on a thumb drive.

  2. I second what others here have said. As this article says, streaming isn’t going to kill downloading. www(dot)hypebot(dot)com/hypebot/2016/04/streaming-wont-kill-downloading-heres-why(dot)html

  3. Apple responded and said this rumor is not true. www(dot)hypebot(dot)com/hypebot/2016/05/report-that-apple-is-closing-itunes-download-store-is-bullsht(dot)html

  4. One also needs to consider the impact that closing the iTunes store would have on it’s position as a mobile platform in competition with Android. Currently, Apple has a small percentage of the actual user base, at roughly 20%, compared with Android’s 70%. The reason they are so successful, in spite of that imbalance, is because of market dominating services like iTunes and their comparatively astronomical profit margins on apps.

    To concede a segment that they dominate (downloads) just to drive consumers to a segment where they are a modest player with much lower profit margins (streaming) would be uncharacteristic of Apple’s long term philosophy and strategy. As their adoption rate among new users continues to shrink and their market share drops in every country worldwide aside from China, Apple realizes that they need to play to their strengths as much as ever. In that light, the iTunes store will probably been around for far longer than just the next five years.

  5. If you’re into indie music, CDBaby.com offers indie downloads as well as CDs.

    Also, several singers and bands that I like offer downloads and CDs of their music on their websites.

  6. The best solution is something like Google Play where downloads are combined into the same service as streaming – that is the route Apple should take.

  7. People still buy CDs and records. No format that has gained an actual foothold truly disappears (well, maybe except for the ones that are truly ‘bridge’ technologies like cassettes). I may have said this in another comment, but some of us literally CANNOT use streaming services at times – I spend the bulk of my “headphones on” time traveling in a metal tube through an underground tunnel that does not get any service (otherwise known as the subway). So I continue to download podcasts/music/etc. when at home or work, and then I don’t have to think about whether I’m connected at all.

    And while you can pry my grandfathered unlimited data plan out of my cold, dead hands, more and more companies have forced customers into capped data plans, which are anathema to streaming services.

    Some segment of the population will always want to “buy” music – whether it’s on downloads or a physical format.

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