Retail & Vinyl

It Will Take Another iPod Moment To Restart The Digital Music Market


IpodBy Mark Mulligan, independent music analyst and author of Music Industry Blog.

The importance of Apple to the digital music market cannot be overstated. Without Apple the digital market would be vastly smaller than it is now. With all of the talk of streaming services and the shift to the consumption era it is easy to think of Apple’s iTunes Store as yesterday’s game. Such an assumption is as dangerous as looking upon the CD as an irrelevance in the present era.


The CD and iTunes combined account for approximately 78% of total recorded music revenue in the world’s 10 largest music markets. And yet neither look like they are going to provide the momentum the music industry needs over the next few years. Despite its vast importance to music revenue today, the CD is obviously on a fixed downward path. And the download is not so dramatically different in profile in that it is the dominate revenue source yet is not delivering the dynamic growth the digital market needs. Key to this is of course the role of Apple.

Apple CEO Tim Cook told us at the launch of the iPhone 5 that ‘Apple still loves music’ and so it does. But music is inherently less central to Apple’s content and device strategy than it was 5 years ago. When the iPod launched it had a monochrome screen and did little else than play audio. Music was the killer app with which to market iPods. Now games, apps, video and books show off the capabilities of colour touch screen iPads and iPhones much better than a static audio file (even if music remains one of the key activities on both those devices). In the early days of the iPod Apple needed the record labels more than they did Apple. Indeed, to begin with the iPod was far from a runaway success.

By the end of 2002, one year after launch, the iPod had only sold 625,000 units. The iTunes Music Store changed the story, delivering not only unprecedented digital music milestones, but also record iPod sales. After the first full year of the iTunes Music Store, sales of the iPod had quintupled from 2 million to 10 million, and one year later they surpassed 40 million. The iPod and the iTunes Music Store had a clear symbiotic relationship. Now though, Apple’s devices benefit from a much broader array of content and services from the iTunes Store, which pointedly is no longer called the iTunes MUSIC Store.

Apple’s diversification of device and content strategy heralded a brave new chapter in Apple’s history but it has also left the digital music market without the fiercely energized catalyst that kicked it into motion. By the time Apple launched the iPhone in 2007, the installed base of iPods was already slowing. Though sales were still increasing, the majority of those were either replacement or additional purchases. So although iPod sales were booming still, the number of new iTunes Music Store customers was not. Throughout 2008 I presented the data to a number of senior record label executives at the time and I argued that they needed to start planning for a post-iPod slow down. Some of them didn’t take me too seriously, and who could blame them, after all iPod sales were growing strongly and iTunes downloads were growing at a stellar rate.

But now, with a few years of market data behind us, the true scale of the post-iPod slowdown is clear (see figure). As soon as iPod sales slowed, so did the digital music market. Prior to 2008 the digital music market had grown by an average annual rate of 85.2%, after 2008 that rate dropped to 7.5%. In many markets the 2009 slowdown was of falling-off-a-cliff proportions: in the US digital growth slipped from 30% in 2008 to a near flat-lining 1% in 2009.

The-importance-of-being-apple

Streaming services have started to bring some welcome momentum to digital music. But much more is needed from them if growth is to be reinvigorated. That growth may also be helped by new music formats like the forthcoming Lady Gaga album app. Whatever the source of it, it is clear that the music needs another iPod momentum to kick the digital market back into life.

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7 Comments

  1. Wouldn’t the decline in iPod sales correspond with the increase in iPhone sales, since every iPhone is a de facto iPod? Consumers don’t need a separate music player when they already carry around their telephone.

  2. Roger: Good point; entirely logical. What I don’t ‘get’ is why there’s little good information on total digital rev/profit across all devices (your point) across the competing ‘ecosystems’ (Apple, Google, Amazon, MSFT & Barnes & Noble). The market says it’s OK for Amazon to have basically no margin on its ‘razors’, for which it will sell a bizillion ‘blades’ in upcoming years, but Apple gets hammered if device margins drop a few points below 35%. Isn’t it time the market started at least discussing this ‘razor blade’ environment in a logical way (again, your point), if not actually projecting its value?
    Regards,
    Iain

  3. That graph makes me angry. Correlation does not equal causation. Its totally meaningless, what it actually shows is that the desire to buy digital music made people buy the more popular MP3 player on the market. What drivel.

  4. Dear J – you have the correlation in reverse – people bought downloads because of the MP3 player not the other way round. There was no download market to talk of before the iPod. Apple effectively created the market for paid downloads. press play, MusicNet and OD2 had tried and failed.
    There is more than simply correlation, there is direct correlation. I’ve been deep diving into these numbers for well over a decade, both the consumer data and the sales data and I know this to be true from the datasets.
    Apple account for 75% of music download sales in the US and close to 50% of all digital music revenues globally (i.e. even factoring in items like ringtones). Thus the behavior of Apple customers directly shapes the digital music market more broadly.
    If you look at the buying behaviors of Apple device customers now compared to 5 years ago you will see a massive diversification in spending to other content categories such as games, apps and video.
    But most importantly there is a very marked slow down in number of new iTunes music buying customers.
    I have pages and pages of data and modeling that underpins this chart. I can assure you that this is true causal correlation.
    If you have any data evidence which suggests the contrary then I would be delighted for you to share it with me.
    Kind regards
    Mark

  5. The iPod was reactionary. You think Apple invented it in a vacuum?
    The iTunes music store was launched in 2003 but the first iPod came out in 2001. Apple were a long way off the first MP3 player manufacturer also, the first mass produced player was released in 1997. Archos and Creative both got there first.
    The first big MP3 store was launched in 1998 and called Ritmoteca. It sold tracks for 99c or alvums for 9.99 and had all the majors on board. emusic also launched that year, Rhapsody in 2001.
    To say that the iPod is the reason for digital music’s sucess is disingenuoous and blatently wrong. You want a reason MP3 sales took off look at file sharing and the realisation that you dont need a physical record collection.
    Also, what logic is it that MP3 sales would tail off now that everyone has an mp3 player built into their phone? Its a stupid argument. You saw a correlation and you determinned a cause from that and thats not how it works.

  6. The other thing that this article assumes ids that more MP3 sales are good. A far more compelling argument is that those sales were canibalising the existing CD sales which were much more profitable.
    You could extend this argument that in looking for the next big thing which may or may not be streaming services, we’re making the same mistake again.
    Or whatever, graph goes up or something.

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