Daniel Eran Dilger
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Forrester’s James McQuivey Announces the Death of iTunes, Again

Forrester's James McQuivey Announces the Death of iTunes, Again
Daniel Eran Dilger
Forrester Research seems to be working hard to publish the demise of iTunes. Curiously, the better iTunes does, the more Forrester researchers ratchet up the alarmist fear-mongering. Comparing the increasingly shrill reports of doom for iTunes with actual sales data makes for an entertaining look at the nature of sensational reporting masquerading as independent research and analysis.

Strike One: Forrester and the Register’s Tale of iTunes Collapse.
A year ago, Forrester’s Josh Bernoff published the results of a study that examined consumers’ credit card data. It looked at the sales transactions of 7000 participating users–only half of whom actually used the iTunes Store–and published findings that suggested iTunes sales had rapidly tapered off between January and June of 2006 by a whopping 65%.

Andrew Orlowski of the Register picked up Forrester’s study and turned it into a headline that announced iTunes’ sales were “collapsing.” Before Orlowski could even print his follow up piece recommending a socialist paradise for music distribution to replace iTunes’ free market music sales with a compulsory taxation model, Apple issued an rare statement denying that iTunes sales were down at all.

Register collapsing iTunes myth

The Register’s ‘Collapsing iTunes Store’ Myth

Panic related to Forrester’s report–and Orlowski’s sensationalism of it–had helped drive Apple shares down 2.9%. Other research groups later pointed out that based on their findings, Forrester’s data was way off the mark. ComScore pointed out that iTunes sales were up 84% over the previous year, with transactions up 67% and dollars spent per transaction up 10%.

Looking at data from different time periods, Piper Jaffray’s Gene Munster found a 78 percent increase in songs sold per week in early 2006, while Shaw Wu with American Technology Research reported a 95% increase year over year from sales of the previous fall.

Forrester had misinterpreted its credit card data and failed to figure in the rush of gift card and allowance purchases that accounted for much of iTunes’ sales. In response to the brouhaha it created, Forrester posted a blog entry blaming the sensationalized reports of plummeting iTunes sales on the press.

Its own graphic of iTunes and iPod sales indicated both were growing dramatically through September 2006, not collapsing. Why was it so quick to publish data that suggested the complete opposite was happening?

Itunes And Ipods

In the year since Forrester prepared the above chart, iTunes sales have more than doubled to over 3 billion songs, and iPod sales have doubled to over 120 million units. Apple has also tripled its video sales from 15 million at the beginning of 2006 to over 50 million by the beginning of 2007. The number of downloads sold per iPod has also doubled since 2004 and has steadily increased over the last year, creating a widening margin between iPod sales and iTunes downloads.

iTunes outpacing iPod sales

Strike Two: Forrester Loves Ads, Bets Against iTunes.
Arguing against such numbers–or insisting they are a sign of impending collapse–is now so far fetched that Forrester has resorted to new tactics this year. Rather than suggesting that sales are in trouble right now, Forrester has decided to insist that iTunes sales will fall apart at some point in the future. Such predictions can’t be immediately refuted with facts.

This spring, Forrester’s James McQuivey announced that the market for paid video downloads was headed toward obsolescence. His report was a thinly veiled assault on Apple’s iTunes, which–in just a year and a half of video sales–already had clearly dominated paid video downloads of TV programming. Apple had just launched new plans to expand into movie downloads. Within three quarters, Apple had already sold two million movies and over 50 million other videos, gobbling up the lion’s share of video downloads by June of 2007.

This time around, Forrester didn’t deny that iTunes was raking in millions of dollars of video sales–most of which Apple pays out to the content owners–but rather laid out a variety of competitors predicted to drain the life from iTunes by delivering video content for free, sponsored by advertising. Specifically, McQuivey bet on Microsoft and Adobe ushering in a new world of video with embedded commercials. He said consumers would “applaud” these efforts granting them the privilege of watching video for free in exchange for forcing them to sit through ads.

What McQuivey didn’t seem to grasp was that consumers already have many avenues for ad supported content. All the downloads in iTunes are being sold to users who opted to pay for content rather than finding it for free. He ignored this obvious fact to present the idea that, “New technology such as the recently announced Adobe Media Player will allow consumers to download video for playback without losing the ads that were sold with the video,” as if such ads were a feature.

Have consumers abandoned DVD sales to watch movies on TV with commercials? No, actually the opposite was true; consumers paid a premium to buy DVDs rather than try to catch movies on TV, even when they are presented for free via advertising. Despite the industry infatuation with ad revenue, consumers have repeatedly voted with their dollars to pay for premium content rather than sit through commercials.

McQuivey warned that Apple would even have to convert Apple TV into an ad supported system that broadcasts “YouTube as well as ABC.com TV shows.” While Apple did unveil YouTube support, there are no ads anywhere. Apple is allowing users to view content without shoving ads in their face, just as with the iPhone and iPod Touch. Why is Apple ignoring McQuivey’s advice?

Apple’s online sales are through the roof, with Apple now delivering 91% of paid TV downloads and 42% of movie downloads, twice as much as the second place Vongo at 21%. Movielink and CinemaNow both have 15%, leaving everyone else to fight over the remaining 7%. Perhaps Apple is ignoring McQuivey because Apple has far more data available to it about what consumers really want.

Forrester Research: Epic Terror of iTunes and Apple TV

Forrester Research: Epic Terror of iTunes and Apple TV

Strike Three: McQuivey Now Insists iTunes Video Hasn’t Succeeded At All.
If you can’t model the present, and have no grasp at predicting the future, the only step remaining is to simply deny the truth and hope you can at least fool enough people to create a false impression of reality. With enough false information, you might even be able to turn the tide in your favor.

McQuivey’s prediction that ad supported video would usher in a replacement to iTunes and kill the runaway success Apple has enjoyed–over the last two years in both song and now video sales, and over the last year in movie sales–hasn’t materialized at all. Rather than rethinking his prediction, McQuivey has recently simply wished iTunes’ majority share of video sales out of existence.

Yesterday, McQuivey published in CNET an idea he’s been shopping around a variety of online rags in the footsteps of Forrester alumni Rob Enderle. From Wired to Computerworld to the notorious MacNewsWorld, McQuivey has been popping up regularly with sound bites of doom for Apple’s iTunes video business, many of which play upon NBC Universal’s decision to stop selling its content in iTunes in order to pursue ad-only distribution.

“Nobody in the TV or movie business really wants to help Apple do to video what it did to music — that is, become the dominant electronic reseller,” McQuivey keeps repeating. In his own full page article in CNET, McQuivey shifted from an expert source to editorial opinion writer, expanding upon his scattered quotes to deliver a full blown treatise on why iTunes was doomed, starting with the idea that iTunes hasn’t already achieved a dominant position in video sales.

If the Truth Doesn’t Fit: Make Stuff Up.
Under the headline “Why Apple can’t do to video what it did to music,” McQuivey outlined why iTunes is in such potential trouble. First off, “media executives have spent the last two years fretting that Steve Jobs could wreak havoc on the video distribution business the same way he upended the music industry.”

This might be news to the CBS executives who recently noted they were very happy with their iTunes business, as well as FOX, which just joined CBS in promoting its season premieres for free on iTunes. It is also in talks to add its movie library to the iTunes Store.

Viacom billionaire Sumner Redstone recently noted “iTunes has ‘resurrected the music industry’ by creating a legal, affordable, instantly gratifying purchasing system for fans. The challenge now is for the film industry to catch up, and for competing companies to work together to establish new standards and practices.”

CBS and Fox offer free TV through iTunes US – iPod/iTunes – Macworld UK
How iTunes Saved the Music Industry – BU Today

McQuivey next attempted to describe another idea why iTunes was doomed to fail in video, saying Apple’s “media distribution strategy is not going to work in video like it did in music” because “the movie industry won’t let you rip DVDs to iTunes.” If anything, one might think this would enhance iTunes movie sales rather than harm them.

Even so, surely McQuivey knows that that the music industry is also against ripping CDs, and that ripping DVDs isn’t exactly something the movie industry can stop. With tools like Handbrake, even non-technical users can rip their DVDs for use on portable players like the iPod and for Apple TV with a click of a button.

McQuivey next brought up WalMart’s wider selection of online movies without noting that that availability hasn’t translated into actual sales. And then, the pièce de résistance: Apple’s strong TV sales are “stalling” because of the departure of NBC Universal, which he estimates to make up 30-40% of iTunes TV downloads. “Without NBC’s content, iTunes is only 60 percent of a store,” McQuivey announced.

Perhaps Forrester needs to do some research: iTunes isn’t a partnership, its a retail store. Apple is acting as a retailer, and content providers are marketing their content through iTunes. The consumers who have decided to use iTunes to download video aren’t going to leave because NBC pulled its shows; they’re going to buy content that is available, content from CBS, FOX, Viacom, and others. NBC abandoning iTunes makes as much sense as pulling its licensed merchandise out of WalMart to spite that retailer.

McQuivey seems to realize how precarious his logic is. He warns CNET readers, “don’t let the Mac geeks posting angry blogs against NBC fool you. Any supposed backlash against NBC will not materialize,” leaping away from the real problem: NBC isn’t going to suffer from angry blogger backlash, it’s just going to suffer a 100% drop in iTunes revenues while Apple promotes other TV content instead.

Why Low Def is the New HD

Why Low Def is the New HD

Forrester’s Advice to Apple: Be Like Microsoft, Destroy User’s Media, and Chase Adware.
McQuivey is already casting a bad light on the competence of Forrester Research, but his next advice to Apple further reveals both his tenuous grasp of reality and the real message he is working to seed. “There are additional obvious things Apple can do, like changing from a download-to-own model to a pay-per-view movie model, a strategy that Hollywood has embraced and that also solves long-term storage problems for consumers.”

Yes, exploding media rentals! That worked so well for Microsoft. Things get even weirder as he keeps going. “However, the real innovation comes if and when Apple funnels more Web video–both professional and user-generated–into iTunes.” How about the video content in iTunes’ 100,000 free podcasts?

“Of course, the only way to download Web video without getting sued is to let Web video providers embed ads in the video streams that iTunes will capture. Have no doubt, the 6 million U.S. households with video-enabled iPods would be welcome target customers for top video sites’ advertising ambitions,” McQuivey continues.

Right, we’re all demanding more ad content in our iPods. Is it possible that McQuivey doesn’t know that the iPhone and iPod Touch already stream YouTube and live podcast video? Has he not yet grasped that Apple doesn’t do content advertising? And why should Apple? It’s in the hardware software integration business. It runs iTunes to make sure there is compatible commercial content for its media players, not to prevent media playback on other systems or to persecute the companies that make millions selling their TV and movies through iTunes.

So much of McQuivey’s analysis makes so little sense that it calls into question how sound the rest of Forrester’s statistics are. Does McQuivey really think he now has the capacity to out think the market leader after being so wrong in his last attempt? Will McQuivey become another Enderle hounding Apple with made up research and erroneous pontification, or will he move on to other subjects after being proven wrong about iTunes?

We know Apple is leading media downloads because we have actual sales data. We also know that Forrester Research is not paid by Apple to make up its headline generating reports. That suggests a connection between the amount of anti-iTunes rhetoric it puts out and its credibility as a research outfit.

What do you think? I really like to hear from readers. Comment in the Forum or email me with your ideas.

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  • http://www.pwnership.com tomreeves

    Great write up.

    McQuivey, what a name! I made a remark or two on my blog (pwnership.com) on his article.

    The simplest point I can think to make is that portable devices (mainly iPods) are a new distribution channel, like TV itself. Consumers substitute content, not necessarily needing the same material. When it comes to substitution, free beats cheap and easy, and cheap and easy beats costly and hard.

    Studios will fail with hard and difficult even if they don’t make their materials available via iTunes. Consumers will substitute music, podcast, YouTube, torrents, ripped media, etc.

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  • stevelee

    Didn’t you mean “shrill” reports?

    I guess “shill reports” could make sense, reports about shills or reports from a shill, maybe, but the context suggests you are referring to the stridency of the reports.

  • lmasanti

    As someone already said: “News of my death were greatly exagerated”!

  • John Muir

    Forrester “Research”: Making Stuff Up Since Before The Big Bang. Way Before. Seriously.

  • clinicaltechmaster

    McQuivey is either a hired anti-Apple gun or abysmally ignorant …. or both. What an unimportant little man.

  • http://web.mac.com/lowededwookie lowededwookie

    “Forrester Research” there’s a misnomer if ever there was one.

  • Pez

    cnet has become nothing more than Microsoft shills any more. I have completely lost all respect for their so called “Journalism” and “product reviewing” ability. It’s pretty tiring to see day after day that they can’t come up with anything more than misleading pseudo-information about why everyone should jump ship on Apple. I understand that there are other products out there that consumers are interested in, but every single MP3 player is “the iPod killer?” or “the iPhone killer???” Where does this need to “Kill” a fantastic product? Nobody has come up with a better PMP or Market place than Apple and that is why they’re always on top in sales etc.

    Boycott cnet!!!

  • nat

    On the subject of iTunes video sales, specifically movies, how do you think the recent $5 price hike will affect sales? Is $5 less than a DVD too much for a movie? It’s also $5 more than simply going to the theater. While it doesn’t directly affect me as I use Netflix, I really hope this increase is only to get more movie studios on board.

    What I anticipate is that by this time next year, when Apple will (probably) have many iTunes Plus movies (like their iTunes plus music videos, w/ higher quality audio/video) they’ll drop the movie price back to $10! :D

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  • BjK

    Although I agree with the article as a whole, I’m afraid that I would have to disagree with your comments about downloadable movie rentals. While you lump movies into the broader category of “media rentals,” there an important distinction between movies and music, music is listened to many times, whereas movies are more likely to be viewed one time. The popularity of blockbuster, netflix, and innumerable local rental locations serves as testimony to that fact.

    Of course I would agree that embedding ads into the content would be moronic.

  • http://www.pwnership.com tomreeves

    @BjK – If movies were as cheaply as music with the same ease of digital copy, the rent / buy relationship might well change. Consumers would be far better off. Who knows about the studios.

    I wonder what NBC’s market share is in the torrents market after pulling from iTunes. Any guess?

  • billyc

    Great article! However even Steve Jobs admitted there are only 20% music on IPods are purchased via ITunes. One of the reason made IPod big success is that it plays no DRM music in mp3 format including a lot of music from P2P. It is ironic to say, but somehow it is true, the boom of digital music started from illegal downloads. ITunes’ success was because people’s awareness from the illegal music downloads.
    So far, in the video world there is no dominant compression format like in the music world mp3 format. One reason ITunes video is not as popular as music is it won’t play other format no DRM video, like divx or xvid which are highly popular format on P2P download networks. There are plenty enough people who have video IPods had never played videos on their IPods. What Apple needs to do is to allow ITune and IPod play divx, xvid video. Once people getting comfortable with Videos, they will move to legal downloads just like what happened to music. Additionally the mp4 format Apple supports does not compress the file size as good as divx or xvid. For the same quality of the video divx and xvid format videos is much smaller than the mp4.

  • gus2000

    We finally have a real iPod/iTunes killer from Nokia. If you buy one of their phones, it will give you all the music in the world for free. For a year, anyway.

    I’m still trying to figure out the business model for selling things for free. Maybe they’ll make it up in volume?

  • thgd

    “…how do you think the recent $5 price hike will affect sales?…”

    I don’t see any price hike for iTunes movies. They are the same price they have always been, $12.99 for the newest films before release and a few weeks afterword then $14.99 thereafter. Older films have always sold and still sell for $9.99.

    And for those who keep complaining about a lack of movie content on the iTunes store, they should look again. There are more than 1,000 to choose from with more added every week. The content includes some incredible classics and marvelous new movies plus independent films.

    In typical Apple fashion, the iTunes video store is methodically growing while the “expert” pundits have been looking the other way. It’s not going to disappear anytime soon.

  • Paul

    “…will allow consumers to download video for playback without losing the ads that were sold with the video”

    “a pay-per-view movie model, a strategy that Hollywood has embraced and that also solves long-term storage problems for consumers.”

    Possibly the most unbelievably funny sentences I’ve read this year. Are there people that actually think this way or fall for this kind’a crap?

    As usual, I feel much better after reading another great article at RDM. It’s nice to be reminded that there’s still some people that can think for themselves.

  • nat

    thgd said:
    “I don’t see any price hike for iTunes movies. They are the same price they have always been, $12.99 for the newest films before release and a few weeks afterword then $14.99 thereafter. Older films have always sold and still sell for $9.99.”

    Really? I thought new releases were, $12.99 (as you stated) and then $9.99 after that. When did the switch from $9.99 to $14.99 occur? I ask because I recently read a story posted on InsanelyMac about the change in price.

    The original story came from ars here:

  • shaun

    thgd is right. Since the store launched last year it has been $12.99 the first couple of weeks after release, $15 after that, and $9.99 for archive movies.

    However, the report is that the WHOLESALE price will rise to $15, meaning Apple would either need to charge more per movie or take no profit.

  • http://www.roughlydrafted.com danieleran

    @ billyc: The problem with xvid/DivX (H.263) is that there are lots of weird variations, it’s based on the archaic AVI format, and its overwhelmingly pirated. AVC/H.264 is more efficient and it’s easier for Apple to support as a standard format.

    Of course, you can add xvid/DivX codecs to QuickTime and play back your DivX content in iTunes. You can even (with some effort) install those codecs on Apple TV. The problem is that you can’t install codecs on the iPod, because it doesn’t play video using QuickTime, but rather plays back video using decoding hardware.

    That’s far more efficient, resulting in better playback at lower battery use. It’s also possible to use QuickTime to transcode DivX to H.264 for playback on iPods.

    The short answer would have been: Apple can’t add DivX support to the iPod, but it doesn’t need to.

  • billyc

    @danieleran Thanks for your reply!In my opinion, it is due to the popularity of piratied mp3 in music, the ITunes and IPods combination fullfilled consumers’ portability wish and became a success. In terms of video, H.263 is much more popular than H.264 on the Internet because two reasons: 1.The file size for the same quality video is smaller (read the artical “Why low def is the new HD” from this site). Have you tried to purchase a movie via ITunes? Have you look at the size of the movie and how long it takes to download via a normal 6MB broadband? The file size for 640×480 H.264 movie, it is easily over 2GB. For the same resolution H.263, it is around 700MB. You can see what difference it will make in terms of download time and storage. 2.Easily find pirated contents on the P2P. Once again, it was people who had pirated or ripped mp3 looking for a easy portable solution made ITunes and IPods a success, not the other way around. That is why it is only 20% music on IPods is purchased via ITunes. For the same reason, video on IPods is not as polular as the music, becauses it is not playing pirated or ripped H.263 format videos. Not untill the chipset on IPod plays both H.263 and H.264 like it plays mp3 and AAC, you will not see a great demand from users for video on IPod. Today, IPods contain a dominant percentage of music downloaded legally or illegally. It is not the same story for IPods if we talk about the videos.

  • Tilneys

    @Gus2000 The nokia/universal “free” music solution is a complete and utter nonsense. How much in data charges will it take to download one song? And are you going to waste time on it knowing it goes up in smoke in 12 months? It smacks of desperation to me.

  • Albert

    Guys, here’s an engadget story regarding the Nokia and so called free music.

  • nextcube

    bliiyc: the video encoders like H.264 and xvid have a huge number of “knobs” the user can turn – video bitrate, video resolution, video framerate, audio codec, audio sampling frequency, audio bitrate, motion compensation, on and on. You can’t just assume that two files are equivalent just because they’re “rips” of the same movie. ITMS uses a higher video resolution and a higher bitrate for its movie download than most of the movie “rips” I’ve seen on the P2P networks, so of course its files are bigger. If you actually compare encoding head-to-head, H.264 gives you a smaller file for equivalent video quality.

  • thgd

    @Nat: This from an “ars technica” story on September 12, 2006 which is the day movies came to the iTunes store.

    …”Apple has apparently listened to the movie studios, and has adopted a pricing strategy to promote new releases. While new videos will sell for $14.99, studios have the option of offering pre-orders for $12.99, and this special introductory pricing will also be good for the first week that a video is released. Older titles will be sold at $9.99. “

  • nat

    Thanks for the clarification on video prices thgd and shaun.

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  • rahlgren

    So does Forrester do research for the White House? Sounds like the same kind of misinformation and disconnect that comes out of that place.

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