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iTunes is a Scam

Let’s face it.  Even though Steve Jobs and Apple almost single handedly led the major labels into the digital age of music, the numbers just don’t make sense, for anyone but Apple.  With the licenses for the music that Apple sells on iTunes coming up for renewal, it is time for the music industry to take a cold, hard look at the reality of the deal that it made, and consider their options.

According to research firm Fulcrum Global Partners, while the installed base of iPods will quadruple from 2004 to 2005, the average number of paid downloads per iPod fell by nearly 50%, from 31 to 16.  All of those iPods are almost entirely filled with ripped, copied or pirated music.

Here are the numbers as of Summer 2005:

While CD revenues have declined by some $1.7 Billion dollars on an annual basis,
iPod revenues are predicted to total over $4 Billion dollars in 2005.
At the same time, iTunes gross revenues for music downloads are about $200 million annually, with the labels taking home approximately $130 Million.

Do the math:  CD revenues down $1.7 Billion.  Download revenues up $130 Million.  That leaves a shortfall of $1.57 Billion for the music labels.   At the same time, Apple makes $4 Billion off of the iPod this year alone.  Surely the labels cannot be happy with this.  As a major label shareholder I would be outraged.

Those precious music licenses are up for renewal soon.  The future of music is at stake.  What does the smart money say the labels should do?

We Welcome Your Comments

Comments

20 replies
  1. Gary says:

    The numbers also make sense for the consumer, don’t they? Perhaps most of that shortfall is money that consumers are now not wasting on the filler in over-priced CDs. iTunes gives consumers greater access to and more control over the music they want to buy. How is that a bad thing? The labels are going to have to adjust to this shift in power to the consumer if they want to survive. Figuring out how to tap into the long tail is a good place to start. To me, the future of music never looked brighter.

  2. Dave Kusek says:

    The annual sales of music on iTunes amount to about 1 weeks worth of downloading over the P2P networks. There is no question that there is a shift toward consumer empowerment, but this shift is not towards iTunes. Of the 20 million iPods out in the marketplace, not to mention all the other MP3 players, less than 1% of the music on them was downloaded from an authorized online store. The labels need to deal with this phenomenon, rather than be smitten by Apple into feeling that they are all set in the digital space.

  3. Gary says:

    Squeezing more money out of Apple doesn’t do anything to stop P2P users. In fact, it may send people back to P2P if they start messing around with Apple’s system. More people are moving to authorized online music stores every day. The music industry should do all it can to help that transformation along rather than suffocating it with greed.

  4. Scotty says:

    Well, money talks, of course. While Apple is rightly acknowledged as a pioneer in this market, their pricing model is already grossly obsolete. 99 cents a song? That 15-song album STILL costs you $14.85 – not much less than an “overpriced CD” you might pick up at Tower, say, Certainly not enough of a savings to make a difference to the consumer. Of course, it’s not like Apple have a history of stubbornly sticking to inflated prices…heheh.

    What this shortfall indicates is that the consumer is not totally convinced that iTunes is digital music’s promised land. The prevalence of “illegal” downloading indicates that people have already warmed to the technology, and are willing and able to do this. P2P will never die, and Apple will have to seriously rethink its business model if iTunes is to survive.

    If the labels are smart, they’ll see that $4 billion figure and start sniffing around the hardware market instead, if that is indeed where the money is.

    I think this is further indicative of the fact that music itself will become less and less of a commodity, and more a means of advertising, a lead-in to other sales. “You wanna get the new Metallica album? Sure, great, but you need an MP3 player first…”

  5. Scotty says:

    Well, money talks, of course. While Apple is rightly acknowledged as a pioneer in this market, their pricing model is already grossly obsolete. 99 cents a song? That 15-song album STILL costs you $14.85 – not much less than an “overpriced CD” you might pick up at Tower, say, Certainly not enough of a savings to make a difference to the consumer. Of course, it’s not like Apple have a history of stubbornly sticking to inflated prices…heheh.

    What this shortfall indicates is that the consumer is not totally convinced that iTunes is digital music’s promised land. The prevalence of “illegal” downloading indicates that people have already warmed to the technology, and are willing and able to do this. P2P will never die, and Apple will have to seriously rethink its business model if iTunes is to survive.

    If the labels are smart, they’ll see that $4 billion figure and start sniffing around the hardware market instead, if that is indeed where the money is.

    I think this is further indicative of the fact that music itself will become less and less of a commodity, and more a means of advertising, a lead-in to other sales. “You wanna get the new Metallica album? Sure, great, but you need an MP3 player first…”

  6. Scotty says:

    Well, money talks, of course. While Apple is rightly acknowledged as a pioneer in this market, their pricing model is already grossly obsolete. 99 cents a song? That 15-song album STILL costs you $14.85 – not much less than an “overpriced CD” you might pick up at Tower, say, Certainly not enough of a savings to make a difference to the consumer. Of course, it’s not like Apple have a history of stubbornly sticking to inflated prices…heheh.

    What this shortfall indicates is that the consumer is not totally convinced that iTunes is digital music’s promised land. The prevalence of “illegal” downloading indicates that people have already warmed to the technology, and are willing and able to do this. P2P will never die, and Apple will have to seriously rethink its business model if iTunes is to survive.

    If the labels are smart, they’ll see that $4 billion figure and start sniffing around the hardware market instead, if that is indeed where the money is.

    I think this is further indicative of the fact that music itself will become less and less of a commodity, and more a means of advertising, a lead-in to other sales. “You wanna get the new Metallica album? Sure, great, but you need an MP3 player first…”

  7. The Music Blog says:

    Classical music isn’t carrot juice for the soul

    Then came a British study showing that music played in a classroom of unmanageable teenagers made them more receptive. Teachers found they could actually do some teaching (though interestingly it was classical music that had the good effect

  8. The Music Blog says:

    Classical music isn’t carrot juice for the soul

    Then came a British study showing that music played in a classroom of unmanageable teenagers made them more receptive. Teachers found they could actually do some teaching (though interestingly it was classical music that had the good effect

  9. The Music Blog says:

    Classical music isn’t carrot juice for the soul

    Then came a British study showing that music played in a classroom of unmanageable teenagers made them more receptive. Teachers found they could actually do some teaching (though interestingly it was classical music that had the good effect

  10. will says:

    well put, well said. true. good blog. 99$ is insane, i agree. “if i had a dollar for everytime i sang”.. well now they do.

  11. will says:

    well put, well said. true. good blog. 99$ is insane, i agree. “if i had a dollar for everytime i sang”.. well now they do.

  12. Angelo S. says:

    I just don’t think this is a big deal. Between Cds and mp3s, people are only getting what they pay for, which isn’t “whole” music. People miss out alot of rich sound on these digital means. Soon enough people will be buying more LPs again and enjoying the sound and aesthetics that their dad did. Ipods are here to stay though. As far as portable music, it bars none. I think there will be something in the future where people buy LPs and get a free code to download digital versions of whats on their record for free, so they can have superior sound, and portability. It will be the only way people will do it, too. No one will just buy records and not be able to easily transfer it to their computer. However, this only makes sense if artist’s use high-quality recording. Using protools at 44.1 or 96 khz doesn’t make things any better than normal Cds.
    This comes from an 18 year old who discovered how rich The Allman Brother’s At Fillmore East sounded on vinyl months ago…

  13. Angelo S. says:

    I just don’t think this is a big deal. Between Cds and mp3s, people are only getting what they pay for, which isn’t “whole” music. People miss out alot of rich sound on these digital means. Soon enough people will be buying more LPs again and enjoying the sound and aesthetics that their dad did. Ipods are here to stay though. As far as portable music, it bars none. I think there will be something in the future where people buy LPs and get a free code to download digital versions of whats on their record for free, so they can have superior sound, and portability. It will be the only way people will do it, too. No one will just buy records and not be able to easily transfer it to their computer. However, this only makes sense if artist’s use high-quality recording. Using protools at 44.1 or 96 khz doesn’t make things any better than normal Cds.
    This comes from an 18 year old who discovered how rich The Allman Brother’s At Fillmore East sounded on vinyl months ago…

  14. Angelo S. says:

    I just don’t think this is a big deal. Between Cds and mp3s, people are only getting what they pay for, which isn’t “whole” music. People miss out alot of rich sound on these digital means. Soon enough people will be buying more LPs again and enjoying the sound and aesthetics that their dad did. Ipods are here to stay though. As far as portable music, it bars none. I think there will be something in the future where people buy LPs and get a free code to download digital versions of whats on their record for free, so they can have superior sound, and portability. It will be the only way people will do it, too. No one will just buy records and not be able to easily transfer it to their computer. However, this only makes sense if artist’s use high-quality recording. Using protools at 44.1 or 96 khz doesn’t make things any better than normal Cds.
    This comes from an 18 year old who discovered how rich The Allman Brother’s At Fillmore East sounded on vinyl months ago…

Trackbacks & Pingbacks

  1. […] Since that time Apple has reaped tens of billions in sales of iPods, while the labels have lost tens of billion in sales of CDs. It has almost been a complete one-to-one swap of revenue from the label, writers and artists pockets – into Apples. See an analysis I did of this a while back here. […]

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