The Apple iTunes Service


Apple iTunes service to revolutionise purchasing behaviour of music.

In June 2004 Apple reported that it had achieved sales of over 800,000 songs in one week from its newly launched European version of the iTunes service, 450,000 of which had been sold in the UK alone. Overall Apple recently announced the sale of its 100 millionth song world wide via their iTunes service since it started in May 2003. Just as the Apple 'Mac' computer caused something of a minor revolution in the computer industry, the firm hopes that the tunes service will do the same to the distribution of music and other forms of entertainment such as film and books including 'talking' books. Big changes are taking place in the entertainment and communications markets. Song, films and books, the main revenue source for film studios, record companies and book publishers are increasingly being sold via the Internet in digital format. In addition the huge rise in popularity of the Internet, mobile and wireless networks enables this digitised 'content' to be distributed at much higher speeds and to larger and wider audiences that previously. This new technology is altering the consumer behaviour of entertainment purchasing and consumption and altering the competitive environment in what was thought to be a mature market.

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Apple's relative success in the music business was somewhat fortuitous and serendipitous. Management were aware of shortcomings in their famous Apple 'Mac' computer. In the 1990's when young people stated to down load music from the Web and 'burn' it onto CD's Apple 'Mac' did not have CD 'burners'. Soon realising that they had made a big commercial mistake the firm introduced the iTunes program to help their customers store and manage their music collections stored on personal computers. This innovation then led on to the development of the iPod which is a portable device to allow users to take their music with them. The rationale for the development of the iPod was that if customers were going to keep their music collections on their PC's, then they would need a portable device to enable them to listen to music away from their PC's. The technology was around and devices were available but could only store a few dozen tunes whereas the iPod can store around many more. The iPod is a musical dream come true, the fourth-generation iPod offers huge capacity, letting users easily slip up to 10,000 songs into their pocket and enjoy it wherever they go, in the car, on the treadmill, at the office and around the house. That's when Apple set their mind to tackling an even bigger problem: persuading the major music companies to make their music available for legal downloads. For years, the record labels focused more on stopping 'song swapping' on free sites such as Napster than on building a legal download business. But Apple argued that 80% of consumers would pay for music downloads if there were a simple, affordable way to do so. By mid2002, Apple was moving ahead with a prototype to do just that.

A key meeting occurred in the Autum, when Warner Music Group Chairman Roger Ames travelled to Cupertino to interest Apple in a super secure new kind of CD. After a few minutes of discussion about the CD, Apple gave Ames an early demonstration of the iTunes store. Apple presented their 99 cents per song pricing scheme and said that all the record labels would have to be involved for it to work. While Ames was not ready to sign on, he and Apple continued to meet in New York and Cupertino. One important step, Ames says, came when the two debated why radio developed so much more extensively in the U.S. than in Britain. Apple said it was because there are no fees attached to U.S. radio. The argument resonated with Ames, convincing him that fewer restrictions on downloaded music would help sales.

So Ames urged rivals such as Universal Music's Iovine to take a look. Iovine says he was "blown away. This guy had been doing serious thinking while we were all flatting our heads against a wall." Apple CEO Steve Jobs also met with 20 top artists, including Bono, Sheryl Crow, and Mick Jagger. "So many artists were on the fence about the digital world," says Island Def Jam Music Group's Lyor Cohen. "It really showed his determination to make this happen."

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Within days of iTune's unveiling last April, it was clear that Jobs had a hit on his hands. A million songs were sold the first week. "We've shown there's a way out of this mess, that there's a legal alternative consumers can use that's better than stealing online," says Jobs.

Apple is going to get major help in keeping its lead in music. A deal with YIP will put iTunes software on 9 million PCs a year and put the marketing muscle of HP behind iPod sales. America Online Inc. just made iTunes the exclusive music store for its 26 million subscribers. And on Feb. 1 2004, Pepsi Cola North America ran a Super Bowl ad publicizing a 100 million song iTunes giveaway.

There's more Apple can do. It could cut wholesale deals for its iPods, similar to the one with HP, with other companies. That would put more marketing behind the iPod while taking potential rivals out of the market. Jobs won't comment on the possibility. What if rivals begin taking share? Apple could field a much cheaper model by introducing a player based on flash memory, which costs less and has a lower capacity than a hard drive. A more radical step would be to load Microsoft's software onto the iPod in addition to Apple's so it could play music from sites other than iTunes. That would give comfort to people who like the iPod but want to buy music from, say, the 88 cents a song WalMart site, which uses Microsoft's software.

Could Jobs work his way around such obstacles. Before he founded iTunes, the major record companies had their own music download sites, with a hodgepodge of copyprotection technology. Sobs cut deals with all the majors so customers could go to one place for all their music with standardized, reasonable copy protection. It's possible he could work out a similar deal for movies.

Times have changed, and the music market is different. For starters, Apple is building a captive audience for iTunes Music Store. Every 99 cent download represents an investment for a music lover and an additional disincentive to ditch their iPod and go with, say, a Dell Digital Jukebox. Convening an entire collection into MP3 format and burning it onto disks would be a major hassle. And no one wants to go out and replace their music collection every time they switch players.

The huge success of iTunes and the similar achievements of Napster and OD2 across Europe are sending a tremor of fear across the world of the traditional music industry, especially since it has been suggested that the online music industry could be worth up to $36bn and could by the end of 2004 account for a third of all UK singles sales. For example, the band Pixies recently launched their new single 'Barn Thwok' exclusively via iTunes and thus quickly and cheaply distributed it to millions of fans across Europe and the USA. Merrill Lynch and Co. estimates that half of Apple's revenue growth for .2004 will come from digital music with iTune sales predicted to grow tenfold to $220m. By breaking the method of traditional distribution of product and services Napster, iTunes and OD2 have revolutionised an industry albeit it in three different ways.

Whereas Apple's iTunes is primarily a supplier of online music via a click and download service, Napster is first and foremost a subscription service building an on line community and OD2 supplies music and infrastructure services direct to other music distributors such as MTV, Virgin, HMV, Tiscali, and MSN. Now, Wal Mart stores are also entering into the fray. More details about the respective services offered are found below.

Now it seems that online newspapers are queuing up to enter the download market. In the UK, the Guardian Unlimited in a deal with EMI is launching a service around the Glastonbury rock festival and the online version of the Sun newspaper, The Mirror and The Times were also considering offering download services of music.

No doubt other firms from many media based industries will be looking at the situation closely, and 2004 2005 could prove to be an intriguing one for the distribution of music and the music industry as a whole.

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Motorola for example have joined forces with Apple and iTunes to market a new iTunes mobile music player that can transfer songs directly to Motorola mobile phones (cell phones). With 1.5bn subscribers to mobile phones by the end of 2004 this represents another drama tic way of revising the method of distribution for an established product and service.

News from operators and major record companies, including Sony Music, T Mobile, Universal Music and Vodafone, revealed that all parties in the value chain have been working for some time on plans to make sure that the mobile phone will soon be as important a channel of distribution as the Internet in the short term, and as traditional record stores in the longer term.

T Mobile's announcement probably stole the biggest headlines. In partnership with Sony Music and Universal, it unveiled a new service called Mobile Jukebox, which offers a mix of 90 second music video clips. In a new MPEG4/AAC format called Mobile Mix, which can be delivered over both 2.5G and 3G networks, the Jukebox offers 200 tracks from a range of artists. Mobile Mix is a precursor to a fall length music service, which T Mobile is hoping to launch by the end of the year as new 3G mobile handsets are introduced. The service will be launching initially in the UK, Germany and Austria.

But Vodafone Germany appears ready to stick its neck out and go for a full service right away. In partnership with French mobile music player Musiwave and DRM specialist Secure Digital Container (SDC), it has launched its first full length music service solution for Vodafone Live!. The service, called Music On Demand Service (MODS), is claimed to break bandwidth barriers by bringing secured and fast full length music downloads to 2.5G mobile devices now. It uses the AACPlus codec, which reduces CDquality file size to less than I Mb for a three minute song.

There is now discussion about whether selling music via a mobile will become key in the way the music industry operates and distributes its product and services. Universal Music International VP of e labs, Barney Wragg, thinks mobile will be important. Speaking of Universal's strategic relationship with T Mobile, which led to the launch of Mobile Jukebox, he says, "We've been trying to understand what kind of content will be important to consumers in this environment. This is a good demonstration of how we can generate revenues in the mobile space.

He adds, "It's going to be very important. Our consumer surveys and the telcos' all show music is the number one entertainment content that consumers want." Golding agrees and argues that the imminent advent of players like iTunes and Napster. online will change the digital music landscape permanently, in particular the way record companies sell the music wholesale to intermediaries. Golding predicts that there will have to be two models. "There will be one for Internet music and one for mobile, as it costs more to deliver music over the airwaves than it does over the Web. It's still an evolving market," he says.

SDC CEO Michael Bomhausser thinks the two digital music channels don't have to be mutually exclusive in future models. "It's all about convergence," he says. "I want to have one bill and to be comfortable with music on multiple devices. This is going to be very important." In other words, Borihausser sees a world where you can buy the music via your phone but it's easily transferable to your PC or other media device. "My belief is that mobile phones will replace MP3 players and Discmans on the market today. I see that we can achieve figures like iTunes' recently published 50m downloads in 12 18 months in Europe via both the Internet and mobile channels."

Musiwave CEO Gilles Babinet agrees. "He's right, but it's still early days," he says. "Almost everyone who buys a mobile has access to a PC, but it's more important for the mobile music service to be easy to use. If we can keep it simple it's going to be huge and could save the music industry." But Babinet, who has been a long time advocate for music via the mobile phone, also believes that his business and other competing players will continue to reflect consumers" desire for music derived services as well as the delivery of actual tracks.

Whichever way you look, the internet, the mobile and the music companies believe that by the end of 2004 mobile music will have made an early but significant impact of the future of digital music distribution. Universal's,Wragg says, "The summer is shaping up for more diverse channels. There'll never be just one channel in the future. It's going to be about having the right channel for the way the listener wants to consume music."