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Is Number Two Amazon Rivaling iTunes in Music Sales? Haha No

Amazon takes on iTunes
Daniel Eran Dilger
Jefferson Graham of USA Today reports that Amazon’s MP3 store “has quietly become No. 2 in digital sales since opening nearly six months ago,” behind Apple’s iTunes. That idea is being widely publicized by the big music labels, who hope to gain some leverage against Apple in order to push their own plans for the future of music sales. But is it accurate, is Amazon any threat to Apple’s iTunes, and what effect will the rumored plans for iPod-bundled music have on the online music industry? Here’s a look.


Amazon takes on Apple with copy-protection-free music – USATODAY.com

EMI and iTunes Plus
Graham noted that Apple pioneered DRM-free track sales with EMI, and hoped to expand the “iTunes Plus” deal to other major music labels. Apple offered the labels a cut of premium priced $1.29 tracks in exchange for DRM-free distribution of higher quality, 256kps audio files for users

Steve Jobs was so certain that DRM-free distribution would be a win for both users and labels that he predicted that half the music in iTunes would be DRM-free by the end of 2007. As Graham noted, the big labels outside of EMI scrambled to set up shop with other vendors instead. Only about a third of iTunes’ music is currently DRM-free.

The music industry was already spooked that Apple had amassed too much clout as a music retailer and was changing the business too rapidly. Previous efforts by the labels to set up their own online music stores had all been massive failures, and efforts to partner with Microsoft’s PlaysForSure Windows Media music store licensing programs had similarly tanked. There has not been, and there current is not any music retailer that even approaches the success of iTunes. That left Apple with a lot of leverage, too much in the eyes of some music executives.

Rise of the iTunes Killers Myth

Rise of the iTunes Killers Myth

The iTunes-iPod Monopoly Myth.
Prior to the announcement of iTunes Plus, pundits were insisting that Apple was using DRM to monopolize the market by tying music sales to the success of the iPod. However, the reality was that DRM on music downloads was a condition placed by the music labels, not by Apple.

Further, the relatively small amount of music being sold via iTunes was not a significant factor in tying people to the iPod, nor was the DRM difficult to remove for use on other devices, from CD-R players to alternative MP3 devices.

Unlike the Windows PC, where every software title purchased tied the user to Windows, the average iPod user only has around 25 iTunes purchased tracks. That means they only have to burn two CD-Rs before they are free to switch to any other MP3 player. There was no tied up, anti-competitive market distortion going on; the iPod was simply a much better product than what other vendors were selling, and it continues to be today.

Interestingly, despite all the lamentation by pundits about the cruel domination of iTunes, it was Microsoft’s Windows Media, Sony’s ATRAC, and Real Networks’ Rhapsody that sought to tie users to buying specific hardware. Apple openly supported interoperable formats from the beginning in both the iPod and iTunes. That had far more to do with Apple’s success than the trivial amount of FairPlay tracks purchased by the average iPod users.

The iTunes Monopoly/Failure Myth

The iTunes Monopoly/Failure Myth

The DRM Dilemma.
Jobs publicly voiced Apple’s opinion of DRM in a letter posted under the title “Thoughts on Music.” The media largely reported this as a desperate turnaround in position, despite the fact that Jobs had said the very same things in a 2003 RollingStone interview before iTunes had even ever taken off dramatically.

Jobs had consistently maintained for years that the labels’ insistence on DRM for music downloads didn’t make any sense because they were also selling the same music on CD, which lacked any DRM protection. DRM was only impeding the market for legitimate online sales.

Music sales differed from movies in that films were being sold on DVD, which was already protected by DRM (albeit somewhat ineffectually). Jobs wasn’t vilifying DRM as a way to manage digital rights; he was simply pointing out that DRM wasn’t really serving anyone’s interests in the music business. By removing DRM, Jobs insisted that the labels could legitimately sell far more music, offsetting any minor increase in casual piracy.

Apple – Thoughts on Music
Steve Jobs and the iTunes DRM Threat to Microsoft

Amazon, You’re Our Only Hope.
Shortly after being shamed by Apple’s iTunes Plus deal with EMI, the other three big labels, Warner, Sony/BMG, and Universal, began selling DRM-free music through Amazon in the older MP3 format. Those three labels have refused to sell DRM-free music in iTunes.

Their intent was clear: the labels hoped to water down Apple’s retail marketing power. Apple had pushed for lighter-duty DRM back in 2003 (compared to the totalitarian Windows Media DRM), and won. Apple pushed for single track sales and won. It pushed for simple 99 cent pricing and won. It now was pushing for DRM-free delivery and was making progress. The big labels were furious that Apple was reforming the stuffy RIAA to serve the needs of listeners and musicians rather than seeking to advance the failed status quo, as Windows Media had.

If Apple continued to gain retail stature, the labels feared that iTunes would be able to liberalize the music business even further, perhaps even promoting independent labels with enough market presence to render the big music labels irrelevant.

By throwing their DRM-free support behind Amazon and other retailers, including Wal-Mart, Rhapsody, Best Buy and Target, the labels hoped to undermine the success of iTunes. Once completed, the labels could then return the music business back to a comfortable market fantasy where music:

  • was only available as complete albums,
  • was only available in draconian new DRM formats,
  • and was only available at variable pricing set by the labels to get the most out of popular tracks while also using low tier pricing as a leveraged threat to negotiate with their music acts. In other words, “sign here or we’ll make you a fifty cent bargain bin band.” Labels love the power of variable pricing that iTunes killed.

Universal vs Apple in the iTunes Store Contracts

Are the Labels Winning?
The three labels colluding to refuse to sell DRM-free music in iTunes are trying to spin the tale that their ploy is working, and that the success of iTunes is coming undone while their new partners, including Amazon, are ascending to an equal status. That is not really happening by any stretch of the imagination however.

Apple has a 6 million track catalog, of which 2 million are DRM-free tracks from EMI and independent labels. Amazon has 4.5 million DRM-free tracks from all four of the top labels. That’s over twice as many DRM-free tracks as iTunes, but Amazon also lacks a million and a half indie tracks that fill out iTunes’ catalog.

Even more important than the catalog size is Amazon’s actual sales. The retailer won’t say how many MP3 tracks it’s selling, just as it won’t say how many Kindle book readers it has sold, just as Microsoft won’t say how many Zune units its sold, and just as Apple won’t release how many Apple TV units it has sold. Nobody brags about sales numbers that aren’t impressive.

On the other hand, Apple has widely publicized sales of over 4 billion tracks and its iTunes business is accelerating. iTunes has become the number two retailer of music worldwide after Wal-Mart, which sells the vast majority of its music as loss-leader CDs. According to Nielsen SoundScan figures cited by USA Today, the market for CDs has declined from 89.2 million to 74.3 million year over year between 2007 and 2008, a fall of nearly 20%. In the same period, digital downloads have grown from 189 million to 239 million tracks year over year, an increase of 26%.

The digital downloads market is still considerably smaller; 239 million tracks are equivalent to around 24 million albums, or roughly a third of the 74 million CDs sold. Still, Apple’s retail acceleration and the stagnancy of CDs means that iTunes is poised to become the world’s biggest music retailer later this year.

Did iTunes Kill the Record Store?

Did iTunes Kill the Record Store?

In What Sense Is Amazon Number Two?
What about Amazon? While the labels are working hard to spin Amazon as the “number two retailer of music downloads,” in order to suggest that iTunes has stiff competition, the reality is that Amazon is so far behind iTunes that it is approaching irrelevance. Apple continues to hold on to 80% of the market for digital downloads, leaving Amazon a very small slice of the pie–which also shared with every other online music retailer–making its “number two” status nothing noteworthy.

Amazon is number two because outside of iTunes, there are no effective retailers selling music that a large population wants to buy. The market for selling music–or more accurately licensing music playback rights–is not very profitable. Wal-Mart and the big box retailers snuffed out record stores by offering CDs at low loss leader prices as a way to get shoppers into their stores.

If there were huge profits to be made in selling music, there would be music stores on every corner and digital outlets would be springing up everywhere. In reality, the labels themselves live off the largest cut of music sales, and trickle some money down to the performing artists. Retailers have very little left to make any money on. That’s why online music retailers have been going out of business and regrouping nearly faster than they’ve sprung up, and is again why being number two behind iTunes means so little, even if the labels are working hard to publicize the presence of a “number two” in order to create the appearance of something that isn’t the case.

iTunes Does The Most With The Least.
At the unveiling of the iFund for iPhone software development, venture capitalist John Doerr described entrepreneurs as those that “do more than anyone thinks possible with less than what people think is possible.”

Using the razor thin margins of media sales, iTunes has done just that. It has turned around the music industry, offering a way for labels to earn legitimate sales on convenient, cheap file downloads designed to appeal to users. The reason other digital retailers have failed to match iTunes has little to do with the success of the iPod, and more to do with those other players trying to earn too much in a business that is expensive to run.

Apple turned things around by making iTunes simply a reason to buy the iPod. Microsoft was hoping that Windows Media DRM would provide massive profits from software sales that would float a complex arrangement of media stores and device manufacturers. It didn’t work out because there was no huge demand for buying digital music, particularly when encumbered with the over the top DRM restrictions of Microsoft’s Windows Media.

Apple grew iTunes progressively without demanding back huge profits. In fact, the company has consistently maintained that iTunes is purposely run at just slightly above breaking even in order to primarily serve as an auxiliary service to lubricate the sales of iPods. That was repeated in Apple’s most recent earnings report. Given that Amazon’s MP3 store actually serves the same purpose of delivering iPod-friendly tracks, Apple is not threatened by its existence. Amazon’s MP3 sales align with Apple’s desire to maintain a healthy market for Mac and iPod compatible music.

Analysts, Investors Take Apple to Task For its Best Quarter Ever
Best Quarter Ever: a closer look at Apple’s record Q108 earnings

Does Amazon Threaten iTunes At All?
Apple doesn’t need to own the music business, it just needs to control enough of it in order to prevent Microsoft or others from instituting a DRM monopoly that lacks compatibility with the Mac and iPod hardware, as Windows Media did. If a thousand retailers begin offering DRM-free music in MP3 or AAC formats, they will only serve the needs of Apple. The only threat to iTunes is a resurgence of proprietary DRM that won’t work on the iPod, an increasingly dim prospect in a world where “iPod” is now synonymous with music player.

While the music industry is trying hard to suggest that Amazon is in second place and that iTunes must therefore be weakening, the reality is that there’s no big money in music sales for retailers. That’s the real barrier to online music sales. iTunes isn’t a fiercely anti-competitive player, it’s just doing the most with the least in a way that is very difficult for lessors to compete against.

While Warner, Sony/BMG, and Universal may hope to undermine iTunes in an effort to shift bargaining power from Apple as a retailer back to a 1990s label-centric model where RIAA members consistently raised music prices and arbitrarily forced bad deals upon musicians, that bad dream is now dead. Apple has opened the music industry up in a way that can’t be stuffed back into a box.

Wide scale piracy and the emergence of a variety of competing sources of entertainment have put the music industry up against the wall. Its best hope is to partner with retailers who are pioneering new delivery mechanisms to sell their product, rather than trying to marginalize their best seller in an ill fated attempt to turn back the clock.

Music as a Sponsored Utility.
Fortunately, the RIAA hasn’t learned anything in the last decade, and its ineffectual actions are doing nothing to sideline the concerted, entrepreneurial efforts that Apple is investing in iTunes to democratize music and convert music retail sales from a profiteering business into a utility that serves up culture, sponsored by sales of the company’s hardware.

That’s an attractive proposition for artists, who have historically been best served by and liberated from artistic constraints when sponsored by a wealthy patron rather than being forced to hawk their art as a commercial product themselves, or even worse, being pimped out by a middle man (label) who profits from their work more than they do.

Apple’s sponsorship role in distributing music for the labels, as well as independent labels and musicians who act as their own label, has resulted in cheap and flexible music sales that actually support the work of artists. The next step, as rumored in recent reports, is for Apple to bundle music playback licensing into sales of its iPod and iPhone hardware. This would take advantage of the concept I like to repeat that consumers like to buy hardware but are loath to pay for software.

The idea of bundling music access into the hardware price of playback devices has already raised the ire of other music retailers, particularly eMusic, despite the rumored plans not even being public nor officially sanctioned yet. Such an argument sounds like bookstores complaining about Andrew Carnegie sponsoring libraries, Hollywood complaining about Canada sponsoring filmmakers, or TV producers irate that the BBC or PBS sponsors programming.

Profiteers of culture beware: Apple’s multibillion dollar clout is going to continue to sponsor and promote music, video, and software through iTunes at a price point that will seriously undercut your business plan of making money off the work of artists. And seriously, it will be hard to feel any pity for you.

I really like to hear from readers. Comment in the Forum or email me with your ideas.

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39 comments

1 BjK { 03.27.08 at 4:29 am }

“Apple continues to hold on to 80% of the market for digital downloads”

Daniel, I was sure I remembered reading this in another article of yours, but couldn’t find it. Could you please provide a link for this information? Thanks in advance.

2 ohopkins { 03.27.08 at 5:23 am }

Great article. Apple’s business model really does ensure a situation where they, and hopefully consumers, win which ever way it goes.

It seems, however, that iTunes the application has stagnated recently, receiving few updates that include any major new features. Indeed it is largely the same application (the only major change being the addition of the iTunes Store, but that’s almost a separate app itself) that I remember using as a 1.0 release on Mac OS 9. What has developed since then, however, and particularly in the last few years, which, I think, it needs to respond to, is social networking. Without the kind of socially orientated, collaborative ethos of things like iLike and Last.fm, iTunes the app is in danger of becoming something of relic of the previous generation, operating in one-dimensional unlike the more dynamic and personalisable (not in interface but in interaction) social networking apps.

Anyhow those are my thoughts. Any comments? Anything that people would like to see in future versions of iTunes?

3 russtic { 03.27.08 at 5:37 am }

Did a quick search figures vary between 90% and 70%.

Most recent figure I could find http://www.reuters.com/article/musicNews/idUSN0132743320071203?pageNumber=3&virtualBrandChannel=0

4 CSimmons { 03.27.08 at 5:42 am }

@ohopkins,

the thing is, iTunes DOES have a kind of social networking component, in the form of iMix. Have you tried it? It’s quite cool. Here where I live, many unsigned bands who sell their music on iTunes through content aggregators (for example CD Baby or Tunecore) use the iMix function of iTunes to promote their music themselves within iTunes. You create your own playlists of songs, add notes or summaries, post them in iTunes for the world to comment upon, and of course to buy the tracks in the iMix. Virtual mix tapes.

IMO iMix is one of the most interesting – and least talked about – features of iTunes.

5 John Muir { 03.27.08 at 7:16 am }

It’s so good to be free of the 1990′s. It was a lame time to first be getting into music – £15-20 / $20-30 CD’s anyone? The only thing which made my teenaged music habit look fairly priced was the eye popping price of Super Nintendo cartridges…

When I’d had my fill of the popular stuff and fell in love with independent labels and self-published acts, it just so happened Napster was in full swing circa-2000; and things have been much better ever since.

Down with the majors. Down with all penny-pinching good-for-nothing publishers. Long live the internet revolution! Bringing freedom to the market.

6 PerGrenerfors { 03.27.08 at 7:40 am }

“The next step, as rumored in recent reports, is for Apple to bundle music playback licensing into sales of its iPod and iPhone hardware. This would take advantage of the concept I like to repeat that consumers like to buy hardware but are loath to pay for software.”

This is interesting. Daniel, would you like to elaborate on this and explain how this differs from the “exploding media files” that prevent consumers from actually owning their music?

7 Gig Tonight: Synthetic @ Cavendish Arms. « Cassetteelectrik’s Weblog { 03.27.08 at 7:46 am }

[...] On a totally unrelated note, here’s an interesting article on iPods, Apple, DRM, etc: http://www.roughlydrafted.com/2008/03/27/is-number-two-amazon-rivaling-itunes-in-music-sales-haha-no… [...]

8 Tardis { 03.27.08 at 7:50 am }

If Apple has sold 4 billion songs in the five years since 2003, that’s an AVERAGE of 800 million per year.

“According to Nielsen SoundScan figures cited by USA Today, the market for CDs has declined from 89.2 million to 74.3 million year over year between 2007 and 2008, a fall of nearly 20%. In the same period, digital downloads have grown from 189 million to 239 million tracks year over year, an increase of 26%.”

USA Today actually says “About 239 million digital tracks have been sold this year”, which I take to mean in the first three months of 2008. If so, that would make this year’s sales around the billion mark.

If that’s 80% of the market, and Amazon, Wal-Mart, Rhapsody, Best Buy and Target share the rest evenly, that’s 50 million tracks each. Reaching the number two slot with 50 million and one tracks is still just one-twentieth of what Apple sells. Not surprising that Amazon are not boasting about it.

9 wordwarrior { 03.27.08 at 8:04 am }

I’m not convinced.

It’s too early for either Amazon or Apple to declare victory. Amazon is arguably the best retailer on the internet, and their back end IT (ie web services) is arguably as good as Apple’s (WebObjects).

Also, nobody knows exactly what wholesale deal the labels gave Amazon.

I wouldn’t count out Amazon just yet.

10 lmasanti { 03.27.08 at 10:32 am }

quote:
“The idea of bundling music access into the hardware price of playback devices has already raised the ire of other music retailers, particularly eMusic, despite the rumored plans not even being public nor officially sanctioned yet.”

This is another of the “free gift” that Apple gets from secrecy. People creates rumors and society react to them and they all gives Apple a “market analysis” of possible choices to be made.

11 lmasanti { 03.27.08 at 10:35 am }

quote:
“…and their back end IT (ie web services) is arguably as good as Apple’s (WebObjects).”

Amazon’s web services “provides” computing/storage to external users.
Apple’s WebObjects is just a programming framework for web applications.
They are not comparable things.

12 lmasanti { 03.27.08 at 10:38 am }

eMusic boss disputes Amazon’s MP3 ‘number two’ report
http://www.macworld.co.uk/ipod-itunes/news/index.cfm?RSS&NewsID=20811

13 ewelch { 03.27.08 at 10:44 am }

Why can’t Apple sue the record labels for refusing to sell them DRM-free music when they sell it to Amazon. How is that not anti-competitive tactics on the record lable’s sides? It stinks of RICO.

14 chefmitch { 03.27.08 at 11:15 am }

Daniel – Thanks for the interesting article.

I am surprised no one mentioned that the labels appear to be selling the DRM free music to Amazon at a lower price than they are providing it to Apple. What else could explain that Amazon is selling tracks for $0.89 (vs. the $1.29 in iTunes).

15 Nonsuch { 03.27.08 at 11:21 am }

ohopkins makes a good point about social networking. iTunes covers this to an extent — there have been articles about iTunes music sharing over college networks and the social implications thereof. But I think Apple could do more, and unfortunately, they probably won’t; social networking is one area they seem very reluctant to move into. An interesting competitive blind spot; we’ll see if anyone tries to take advantage of it.

16 Silver_Surfer1931 { 03.27.08 at 11:27 am }

@wordwarrior:

I agree with you. At the same time, Apple did not declare themselves as the winner. I think Apple is leaving it to the consumer as to who the winner is. With this in mind, Apple is certainly the winner. Circumlocutory, yes. But it just makes sense in the publics perception.

17 Jeremy_Bee { 03.27.08 at 11:28 am }

Usually I think you’re articles are great but this one not only a bit thin and old, it’s “FUD-ish” as well. While the main point of the article (that Amazon is *not* number 2 in any realistic sense) is fairly well laid out, you are spreading a bit of “Apple-happy” unsupported rumour when you say that iTunes is “one third” DRM free. Apple might be fond of implying this, but anyone who uses iTunes regularly can see that it is not true.

The one third statistic is based mostly on the “fact” that the EMI catalogue is DRM free and all EMI tracks are counted in the figure when it’s pretty clear that a very large amount of EMI tracks are *not* yet DRM free. Not only that there seems to be no new DRM-free EMI tracks being loaded on the system even though large numbers of them seemingly haven’t been converted yet.

Sure iTunes has a lot of “who-knows” Indie bands that are DRM free because who would even know they exist otherwise. Sure there are tons of Fred Astaire cuts and Ethel Merman probably as well that are DRM free, but again who really cares about them?

There are quite a few “Indie” bands (like BareNaked Ladies for example), and quite a few “Indie” labels (Netwerk anyone?), that have been battling Apple to let them post DRM free music for years and yet here we are a year after Steve’s DRM-free announcement and still there are no DRM free versions of their music. There has been no back-catalogue conversion at all! Period.

So while Apple is not actually releasing the numbers or any of the details on their DRM-free conversions, I would hope that you would do to Apple, what you do to all of the other tech companies, and *don’t* just take their word for it. Specifically, I think the “one third DRM-free” statement is pure hot air.

I’d like to see Apple not only publish their figures, but also their plans on accelerating the conversion and what the heck they are going to do about the sorry state of their content. Amazon’s press release may be a bit of a joke, but they (in collusion with the labels), *are* a big threat and should be considered seriously IMO.

18 jfatz { 03.27.08 at 11:37 am }

Suing certainly wouldn’t serve their purpose and would–if anything–turn public opinion against them a bit more. If Apple wants the public exposure and pressure it brings, all they have to do is release another “industry letter” or the like on the matter.

I rather assume there’s still a lot of talk going on behind the scenes, though. The remaining big three labels are busy watching Amazon sales like a hawk, and will eventually fold to sales pressure if it doesn’t grow at a faster rate than iTunes sales and doesn’t amount to anywhere near the volume to make for an effective bargaining chip.

Right now, I assume they’re just vying for their own terms, while Apple wants them signed up in precisely the same fashion they were already.

I’m pretty sure I know who’ll blink first.

19 John Muir { 03.27.08 at 11:37 am }

@Jeremy_Bee

One of my favourite labels: Eighteenth Street Lounge are iTunes Plus now in the UK. Another fine outfit: Def Jux (or at least their UK franchise) are DRM free on iTunes too. As someone who never buys top 10, 50 or 100 music, I can’t say I agree with your sketch of frozen EMI and the hazy oldies!

@Nonsuch

Very true. Apple’s weak spots (if we can set aside the secrecy thing for obviously contentious reasons) are the enterprise and social networking. About as diametrically opposite weaknesses you can imagine…

20 slappy { 03.27.08 at 11:56 am }

I’m with ewelch. Isn’t this anti-competitive behavior by the labels?

21 gus2000 { 03.27.08 at 12:13 pm }

I’m sorta with ewelch…I don’t think Apple should sue, but isn’t collusion to manipulate markets illegal? At the very least, it’s a little snarky. Shouldn’t the labels just set a “wholesale price” and leave retail pricing to the retailers?

Thanks for the word “circumlocutory”, I had to look it up. I’ll try to slip it into conversation if I can remember all the syllables.

Why doesn’t Apple just buy 10% of Vivendi? That’s about $2.5B, and with that much ownership clout Apple could push Universal, NBC, etc. to play nice.

22 Encolpius { 03.27.08 at 12:23 pm }

The current pricing structures are just nuts. You can find indy, DRM protected tracks on iTunes for $.99 each at, the same tracks on Amazon DRM-free for $.89 each, and again on eMusic DRM-free for $.25 each as part of the 100 for $25 subscription plan.

23 John Muir { 03.27.08 at 12:43 pm }

A circumlocutory circumabulation on the patient’s a priori somnambulism, pro bono of course.

24 nat { 03.27.08 at 3:20 pm }

Could someone explain “the idea of bundling music access into the hardware price of playback devices?”

I don’t know why I’m not catching what this means and whether it’s a positive or negative, but I’d appreciate the clarification. Would Apple be selling iPods with music already on them or something?

25 nat { 03.27.08 at 3:27 pm }

Encolpius,

I’m not sure you can compare iTunes and eMusic. One offers albums for $10, songs for $0.99 with no subscription, while the other asks for $10, $20, or more upfront, which makes its per album/per song prices look surprisingly low. They’re two different types of services. If you only buy a few songs a month, eMusic is a rip-off, and similarly, if you’re crazy about all things indie, eMusic is a better deal.

Also, Apple dropped iTunes Plus songs down to $0.99 a while ago.

26 Swift2001 { 03.27.08 at 4:26 pm }

Isn’t this something like “restraint of trade”? Aren’t the labels, by making their music available to Amazon and others for sale at .89, while withholding it from iTunes, guilty of something-or-other? I guess what they are guilty of is being jerks. It sure looks like revenge, of course, and suspicious as well; after refusing to drop DRM for years, with some of the execs in favor of “forcing Apple and MS to cooperate on a common DRM,” they’ve now conceded defeat, with a kind of spitefulness. If they use the occasion of re-signing up with Apple to jack up prices everywhere, wouldn’t that be an offense? Please, lawyers. Isn’t this price-fixing, or one of those quaint-sounding things?

I wonder if the real truth here is that “control of pricing” that the labels are reported to be insisting on is only part of the truth. I think they want iTunes to look like the record store ads on the weekend: bought and paid for by their marketing departments. Pushing whatever artist the label makes the priority. And I’ll bet they want the right to pull songs from the servers, too, while Jobs wants to continue expanding the store until they have something approaching everything.

27 earth2kelly { 03.27.08 at 4:56 pm }

Wouldn’t Apple have to prove they incurred damages in orders to sue the record companies over this? As far as I can tell, Apple controlled around 70-75% of the download market before this Amazon experiment and they have about 80% now. Seems that if Amazon has indeed grown to #2, they’ve done it at the expense of eMusic, Zune market and the others.

28 mrunderhill { 03.27.08 at 5:07 pm }

Great article!!

This is a subject close to my heart as a former professional musician who has had more than a few record company doors slammed in my face and ripped off by more seedy characters than i care to remember.

Still i’m out of that now but was still on the fringes when iTunes was introduced.

I can remember Big George from Sound on Sound magazine debating these issues surrounding the slave trade that was the music industry and how it would one day “crash and burn” only to rise like a pheonix from the ashes.

It’s funny but we all had our own visions on how the industry would transform itself. Words like rebellion or revolution always sprang to mind but never Apple.

So it seems ironic that a lesser known computer company who’s “tools of the trade” were the bedrock of day to day life in recording studios up and down the country would play such a key role in changing the shape of the music industry we know today.

Long live iTunes.

29 danieleran { 03.27.08 at 6:45 pm }

@Jeremy_Bee: the “only about a third [of iTunes tracks] are DRM-free” comment is based on the catalog numbers reported for Apple and Amazon. iTunes’ 2 million DRM-free tracks are one third of the 6 million catalog.

@ Nat – the idea of bundling music with iPods is that rather than paying for the player and then buying tracks individually, you’d buy a player+music package that gave you unlimited (or virtually so) access to music.

So it would be something like a subscription, but the music would be tied to the player, more like on demand radio. The rumors also suggested the deal would include a certain number of conventional tracks you could download and sync with iTunes and other devices.

Because you’d pay the fee upfront, you wouldn’t have a subscription that expired, so your music wouldn’t be revoked. So its a bit different from exploding media rentals; more like a lifetime subscription, where lifetime was related to the life of the device.

There’s a lot to think about – how much would that be worth, what are the drawbacks, etc. I haven’t given it a huge amount of thought, but it seems interesting from the perspective of its similarity with torrent use: it’s all you can download, but legitimate.

It is basically an opt-in version of the socialist music system that I criticized when Orlowski of the Register insisted that all music should be freely available, and then playback taxed to pay for it. In this system (which is still just a rumor), you opt into the system, making it closer to “private insurance” music system than an RIAA-run, government policed socialized music system.

For Apple, it would give the iPod/iPhone a way to appeal to torrent-savvy users who want AYCE type music access without paying a regular subscription fee or losing their songs. You’d just pay a premium for the device upfront. And as an optional premium, it would only affect those who opt to pay for it.

For the RIAA labels, it would mean a lump sum licensing windfall at each sale, rather than a trickle of purchases. It would also likely mean more consumption of music, which would breed more music sales. Music is currently being overshadowed by other forms of entertainment, and while pretty much everyone likes to listen to music, fewer are paying to do so. Appealing to those who currently browse torrents with an iPod package deal that provides the same kind of access with a better quality product (more consistent quality, ect), legitimately, would rope those infringers into the music buyers’ circle.

While the RIAA wouldn’t see the same cut of 99 cents/track for each sold acquired, they’d be getting something from the huge numbers of users who currently pay nothing. That’s big.

For other music vendors, from Amazon to eMusic to Rhapsody, such a deal would appear to block them out of competition, as there’s no way they could put their DRM on the iPod/iPhone (or is there? SDK 2.0…) to match the same sort of subscription plan.

However, the deal won’t appeal to everyone, as there’s lots of iPod users who aren’t interested in pre-paying to download tracks, and use their iPod solely to listen to their own CDs. Those buyers would continue to be open to using iTunes’ competitors to find music.

30 danieleran { 03.27.08 at 6:53 pm }

@ lmasanti: thanks for the link.

“eMusic CEO David Pakman doesn’t accept a recent USA Today report which claimed Amazon to have become the second biggest incumbent in US digital music sales, after iTunes.

eMusic.com claims to be the second-largest digital music reseller behind iTunes. [...]

“… let’s get one thing straight: outside of iTunes, no one sells more music digitally than eMusic, and we don’t plan on giving up that title anytime soon,” writes Pakman in a blog entry.

Pakman said that USA Today’s claim is based on reports from representatives of the four major music labels, and that USA Today “believed that eMusic’s subscription model was not relevant to the story they wanted to tell.”

For a flat monthly fee, eMusic subscribers are able to download a set number of songs in MP3 format, unrestricted with any form of Digital Rights Management (DRM) technology. By comparison, Amazon.com uses an “a la carte” method similar to the iTunes Store, charging users for individual tracks or albums.

Amazon.com hasn’t made sales data available, but Pakman indicated that eMusic sells “more than 7,000,000 songs a month.” Since Amazon.com’s MP3 store opened in September, he said, eMusic has sold 40 million tracks. Since November of 2003, eMusic.com has sold almost 200 million.

“These are huge numbers, and firmly back our claims to be the Number 1 site for independent music and the Number 2 digital music service after iTunes. Those declarations have not previously been disputed,” wrote Pakman.

Pakman said that his defense of eMusic’s position isn’t intended as a slight to Amazon, who he calls “a pioneer in the world of ecommerce.”

“But in terms of digital music, we are still on top, and will continue to be so. If we ever decide to start selling blenders, we’ll be sure to give them a call,” said Pakman.”

31 nat { 03.27.08 at 7:22 pm }

Thanks for the info Dan. That’s a crazy scheme and I don’t know how I feel about. If it required me to have my iPod plugged into my laptop any time I wanted to use AirTunes, it’d be irritating. Man, though, unlimited access to iTunes’ entire music library!? Very enticing.

32 harrywolf { 03.28.08 at 2:48 am }

Social networking will not make money and becomes banal and irritating pretty quick.
I dont think Apple need to be so obvious – the best networking is natural and usually isnt called ‘the social’…

Amazon sell tracks that are ALL compatible with the iPod/iPhone. Who cares how many they sell? They all end up on iPods.

Thing is, if you have an iPod (most of us do) and you therefore have iTunes – its likely you will buy your online music from Apple.

Perhaps Amazon should license an iPod with Amazon branding like HP did…that might help their sales.

The record biz wont recognise their stupidity until they are destroyed by it – thats the nature of hubris.

33 benlewis { 03.29.08 at 2:25 pm }

It seems to me that many of these questions are superfluous to some degree. We can extrapolate that three of every four DRM-free tracks are played on an iPod. Success for Amazon and eMusic supports Apple’s biz model. Daniel makes this point quite clearly in the essay. This may explain why Apple hasn’t been more aggressive about the obvious (and illegal) collusion.

34 vaporland { 03.30.08 at 10:40 pm }

I believe that the iPod has the majority of “honest” music users, but that they just happen to be in the minority of overall iPod users.

Most people who I know that use the ITMS buy a LOT of stuff from there. They are afraid of illegal downloads and affluent enough to afford to buy music legally. They also are not technically savvy enough to figure out programs like Azureus and μTorrent. iTunes is easy and convenient for them.

All of the people who I know that pirate content, store that content on their iPods.

I believe that what happens is that a small number of iPod users make the majority of ITMS purchases, which averages out to the theoretical 25 songs per iPod.

I also believe that this means that the potential market for online music purchases is much larger than most people realize, if more aggressive prices for unprotected content were ever promoted online by the recording industry.

35 Ephilei { 03.31.08 at 2:37 pm }

What was the former #2?

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