What Happened to the Digital Music Boom? Ask Apple.
by Peter Kafka
Posted on November 25, 2008 at 4:48 AM PT
Big music ignored digital music for a long time. But over the last few years, that’s changed. Now the industry is hoping that fast-growing digital revenue can help it overcome slumping CD revenue.
That has yet to happen. And now digital revenue–to date, that has chiefly meant sales at Apple’s iTunes (AAPL)–seems to be slowing down. Today’s example: Warner Music Group (WMG), which reported its quarterly numbers today.
Those numbers are fine, by the way. Or at least by econalypse standards: Warner posted sales of $858 million and profits of four cents per share, both of which were better than Wall Street’s expectations.
But while digital revenue was up 28 percent, to $167 million, that’s a slower growth rate than the previous quarter. And the one before that. The breakdown:
- Q4 digital growth rate: 28 percent
- Q3: 39 percent
- Q2: 48 percent
- Q1: 41 percent
Digital sales still accelerated overall during the last 12 months; they grew 39 percent and accounted for 18 percent of Warner’s overall sales. A year earlier, those numbers were 30 percent and 14 percent, respectively.
But those quarterly numbers don’t augur well, and there’s a good chance they will get worse in the next quarter, because digital sales are now tethered very closely to sales of Apple’s hardware.
Get a new iPod (or iPhone), and you’re likely to spend a few dollars at iTunes for some new songs. But if demand for Apple products slackens a bit–perhaps because the company doesn’t have a compelling new iPod, or perhaps because everyone who wants an iPod has one, or perhaps because the economy is terrible–then the same thing will happen to digital growth.
Which explains why the industry’s new dream involves generating digital music sales independently of Apple. Through, say, Amazon’s (AMZN) digital music store. Or with the mobile carriers and handset makers like Nokia (NOK). Good idea. But it’s not happening in the near future.
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Comments
I don’t understand your “people only buy music when they buy a new iPod” argument. Did people only buy new CDs when they bought a new CD player in the past? I’m afraid you need to explain your reasoning.
If you’re trying to say that there’s a correlation between slowing iPod sales and slowing digital music growth, then you should’ve just said that. Because existing owners of iPods still buy music, even if they don’t buy a new iPod – it’s the new buyers that bring the growth, but you haven’t made that clear at first reading.
Posted by Christopher Ong at November 25th, 2008 at 5:06 amHi Christopher. People don’t *only* buy iTunes songs when they buy a new iPod. But that’s when sales spike. Not a crazy idea – same thing holds true with other electronics/media player combos like DVD players and DVDs.
Posted by Peter Kafka at November 25th, 2008 at 5:20 amPeter. There is a fundamental difference in the purchase of a DVD player (and DVDs at the same time) compared to the purchase of an iPod (and digital music ‘at the same time’)
DVDs and DVD players are typically sold in the same physical location. However, while iPods are sold are a physical location (or an online store with delivery), digital music is NOT sold at those stores (or else it wouldn’t be digital, right).
I would say that items you would expect sales to “peak” around would be (1) the installation of iTunes and (2) shortly after when people redeem iTunes gift cards.
Further, if you are buying your second or third DVD player, are you necessarily loading up on new DVDs again?
Posted by Wil Maneker at November 25th, 2008 at 6:55 amPerhaps your perspective is backwards. Instead of asking “What happened to the digital music boom?”, ask “Where digital music would be without the iPod?”
Warner would be in much bigger trouble! Because of the nature of digital music, we’re seeing a migration from album sales to singles. In a mature state it’s reasonable to assume that the music industry could become smaller financially even as the number of financial transactions increases.
Posted by John Peebles at November 25th, 2008 at 7:03 amAnd don’t forget the hostility of the public to the music labels for not only ripping them off with their draconian digital rights management, and prosecuting innocent people, and lobbying congress for obscene penalties for stealing $0.99 worth of music, but because they rip the artists off too with a tiny fraction of the money a song brings in.
Buying used CDs on Amazon is a much cheaper way to get music than iTunes or CDs. And lots of people find this perfectly legal way viable. (Of course, the labels would love nothing better than to make it illegal.)
Posted by Eric Welch at November 25th, 2008 at 7:49 amDigital growth has been slowing consistently for years. WMG’s digital growth rate in its Q4 is actually a bit better than that of the industry — for the first six months of 2008, digital growth for all labels was closer to 30%.
I wouldn’t say digital growth is tied to the iPod, I’d say it’s tied to adoption of digital music. Right now, the iPod is most consumers’ foray into digital music. That may change with the emergence of a new product or service. Until then, and as John said, recorded music will be characterized by (a) fewer album sales, (b) more digital track sales, (c) lower overall revenues and (d) more unique transactions.
Posted by Glenn Peoples at November 25th, 2008 at 8:45 amAs a big potential consumer of digital music (I have a substantial CD collection, now all imported iTunes as Apple Lossless) I would be glad to buy lots of albums from iTunes. However all the major record labels except for EMI refuse to allow Apple to sell their music DRM free and in a higher bit rate. As a result, I’m not buying *any* music from these labels until they change their policy.
In their effort to gain business leverage against Apple they have managed to alienate some of their best customers. If they want more sales, they need to reverse their misguided policy at once, and better yet, start selling DRM free losslessly compressed music through iTunes.
Posted by Ted Todorov at November 25th, 2008 at 8:49 amJohn, agree with you that Apple has been a net plus for the labels. They would just prefer that they had multiple players/sales channels. Being intimately tied to a single one is precarious.
Posted by Peter Kafka at November 25th, 2008 at 8:53 amEric, I don’t think the majority of people who buy music – or those who don’t buy music – are thinking about DRM, the RIAA or anything else other than “Do I value this music enough to buy it?”.
Wil, I’m pretty sure most people were not buying DVDs at the same place they bought a DVD player. They bought them on separate trips to Blockbuster, or Best Buy, or Wal-Mart, or whereever. But they bought them early in the lifespan of their new machine. And label execs will tell you the same thing happens when people get a new iPod or iPhone (or, for that matter, a gift card). Remember that most people only buy a few dozen songs per machine.
The holdout majors appear to have capitulated, and previously unavailable non-DRMed tracks are appearing on iTunes as I type this. I’m pretty sure digital music sales will grow again this quarter – it’s the record companies own stubborness in refusing to accept iTunes’ success that has slowed growth, because they’ve tried to get people to use other online stores and instead just turned people off completely.
Ironic that their capitulation comes today, the same day you published this! Let consumers buy the music that they want, unprotected, from the vendor of their choice – iTunes – and see what happens…
Posted by Christopher Ong at November 25th, 2008 at 8:53 amiPod as savior?
DRM is the holdback?
Please. Let’s all agree that the labels are evil, greedy folk (I’m not sure how that separates them from the rest of the Fortune 1000) and that DRM is annoying. Neither of these explain the problem with the recorded music industry. The issue is simple: many consumers, particularly the avid (read ‘young’) aren’t forced to pay anymore as they can simply ‘download’ (er, steal). So why buy? A whole new generation of music consumers who feel fine with taking what they want for free. Unfortunately for products like recorded music, there simply is no effective and efficient way to protect property rights (the basis of capitalism) so the value attributed to these creations is effectively taken by consumers without compensation. Try that next time you are at McDonald’s.
As for the glorious iPod: it’s a great toy, a very useful device; but with regard to iTunes, it is, and always has been, simply cover for Apple. A legitimate, non-infringing purpose for a device whose popularity is almost completely driven by it’s infringing uses. For every iPod sold, about an album’s worth of tracks is sold via iTunes. So should we assume that all those iPods have a dozen songs? Or perhaps they are just filled with user’s CD collections? Both are hard to argue considering the demographic most enamored with this device a) have them chock full of songs, and b) have no CD collection to start with.
The recorded music industry is broken. And that hurts artists and greedy capitalists alike. Perhaps less navel gazing about the ‘evil record labels’ and nasty ‘DRM’ would be in order for all who love music and wish to see it flourish.
Posted by darren cross at November 25th, 2008 at 10:51 amSome apocryphal points:
I have an Apple computer with iTunes, and a Linux based machine. I’ve used iTunes in the past to download music, and then go through a two step (burn to CD and then rip to make files to play on my Linux based machine). Amazon now makes it easy to download unencrypted MP3 files directly (Apple has this option for some things too but at a premium).
I gave an iPod to a Windows user who loved the device, but hated iTunes. While I like it just fine on my Apple machine, I can see why it might not quite fit in with everything else for a Windows user. They made iTunes for Windows simply to tap into the large non-Apple marketplace. It shows. If Amazon can make a downloader for Linux, so can Apple. They need to
stop trying to make Apple computer users out of iTunes, iPhone and iEverything-else product users.
Bundling a dozen tunes into an “album” is a dead concept, just as justifying higher ad rates for a magazine based on the cost of lumber is a dead concept.
While it is true that our youth have been purged by our school systems of any basis for ethical behavior, they are also too too lazy and too spoiled to steal an MP3 file when they can more easily pay 99 cents for it. Hidden behind industry claims of losing money to theft is the reality that they are losing $15 off the sale of an “album” with three good songs on it.
Music production equipment is dirt cheap compared with what it used to be. Nobody is fooled by the notion that the middlemen in this industry are earning their keep. Someone needs to tell them that continuing to wear those party hats simply makes them look like dunces.
Posted by Mac Beach at November 25th, 2008 at 11:35 am@ Mac Beach,
I take issue with two assumptions: 1) ‘too lazy and too spoiled’ to steal vs. paying $0.99. Completely wrong. Hang out with any group of 13 year olds and you will be quickly disabused of this fanciful assumption; and 2) the price of music production equipment as a proxy for what music should be priced at is wrongheaded for a variety of reasons: a) quality musical instruments and recording and mixing equipment are still not cheap, b) talented individuals to devote their time to such activities has an associated cost, and c) marketing and distribution, even in the digital world, entails significant expense. Simply there is no correlation between ‘equipment costs’ and quality of product produced, but there is a correlation between quality and compensation. Pro musicians, like pro athletes and everyone else who works for a living, devote time and energy to honing their skills and to creating on the assumption that they will be compensated to some degree. Only non-musicians would assume otherwise.
Perhaps the current middlemen are over priced, but that doesn’t mean middle men aren’t needed and it does nothing to change the fact that recorded music is currently a product without the defenses afforded to tangible products.
Posted by darren cross at November 25th, 2008 at 12:50 pmmusic biz facts: anyone under 30 years of age uses torrents to download whatever they want, free.
fact 2: music industry is about live shows now, not songs
Posted by Sam Harrison at November 25th, 2008 at 12:55 pmKafka commented: “Hi Christopher. People don’t *only* buy iTunes songs when they buy a new iPod. But that’s when sales spike. Not a crazy idea…”
C’mon Peter, it’s a 99 cent purchase. People buy music when they hear something they like.
This article is more anti-Apple propaganda from allthingsMicrosoft. Another attempt to make Apple wrong and the labels right.
Posted by zato Gibson at November 25th, 2008 at 4:48 pmAt the risk of baiting a troll…
Posted by Peter Kafka at November 25th, 2008 at 8:51 pm“only 22 out of 1000 songs, or under 3% of the music on the average iPod, is purchased from the iTunes store” Source: Steve Jobs, “Thoughts On Music” Feb. 6 2007.
http://www.apple.com/hotnews/thoughtsonmusic/
Darren Cross,
Last year, Apple sold around 2.5 billion songs and 50 billion iPods. That’s an average of 50 songs (or 4 albums) per new iPod — not 1 album, as you suggest. Significantly higher.
If you look at the totals: 170 million iPods sold since 2001, 6 billion songs sold on the iTunes Store since 2003, which is an average of 35 songs (or 3 albums) for every iPod sold.
If you now add the facts that people who buy a new iPod can keep their old iTS songs and that people can have their iTS songs on more than one iPod at the same time (legally!), you will see that the songs per iPod metric does not show how much consumers have actually invested in iTunes and that they’re genuinely willing to pay for something that could be shoplifted elsewhere.
The iPod is really not the problem for the music industry. iPod customers are carrying their fair share of music purchases. The problem is that the iPod has now reached a certain saturation (though iPod sales are still growing in single digit percentages) and the music industry has to come up with solutions for those 90 % of the world that don’t use an iPod.
Apple’s answer to this seems to be that the iPod (and iTS sales rates) are after all still growing and that the iPhone may potentially (in a few years) reach a larger audience than the iPod could.
Posted by Tom Ross at November 26th, 2008 at 2:15 am