According to this Reuters article, some in the music industry would like to see Apple knocked down a peg or two. The market dominance of iPod + iTunes permits Apple to call some of the shots, and that's making some music execs uncomfortable.
Label sources say Apple stubbornly disregards their suggestions for drawing in new digital music customers. They say they would like more flexibility on track pricing and promotions. But more than anything, labels want to see the iPod become interoperable with music services other than iTunes.
"It's a monologue with them," one label executive who asked not to be identified says. "They pretty much say, 'This is what we want to do,' and if you disagree with them you're an idiot. It's like dealing with a cult."
Let's consider these ideas from the anonymous source in the article. Would the music labels benefit if Apple did as they asked?
Flexible pricing
Apple's current approach to pricing emphasizes consistency, not flexibility. Each track in the iTunes store costs the same. There's no reason to expect that prices will drop next week. Consistent pricing makes it possible to craft a short, simple marketing message, which is pretty important when you're trying to popularize a new product (in this case, a new concept: digital downloads).
Let's assume for the sake of argument that flexible pricing = lower prices for some songs, albums or artists. Is this a good idea?
Discount pricing moves product in the short term, but it has a cost. Consumers who buy at full price are annoyed when prices drop later. Worse, it trains consumers to buy when prices are low, which reduces profits.
Support for other music services
Making the iPod interoperable with other music services requires Apple to make concessions to competitors. If iPods could be used with other music services, the iTunes store might lose business. If iPods supported secure Windows Media files, it would doom the AAC file format and place Microsoft in the driver's seat. Do label executives really think they would be better off if Microsoft was the dominant player in music downloads?
Apple's advantage is its control of The Whole Widget (iPod + iTunes + iTunes music store). Any move to support a competitor ultimately threatens the survival of the iPod, the iTunes software or the iTunes store.
iPod Killer Wanted
The Reuters article suggests that Samsung or Sony could challenge Apple's dominance of the market, but I can't see that happening without some major changes in the market. Samsung can't control the market without a music store. Sony can't control the market as long as the Connect store relies on Microsoft's Windows Media file format.
Subscription services like MSN and Napster can't control the market without the iPod. When Napster's Mark Shea describes the iPod + iTunes combination as "a hardware trap" he is expressing the frustration of many competitors. Their growth is limited by Apple's success. If your service doesn't work with the market-leading iPod, what chance do you have?
The real threat
The key to beating Apple is not lower prices or Windows Media compatibility. As long as Apple continues to offer consumers the most attractive, convenient and affordable approach to digital music, competitors don't stand a chance.
1. Jim on August 22, 2005 12:58 PM writes...
The record companies are only interested in increasing their profits. They quite happily screw their customers and expect to be thanked for it. Why do they think they know best? Why don't more artists shum them and distribute their own material? The internet allows this sort of business model which would greatly empower the artist, instead of the record execs.
The subscription model is nirvana for the record companies. They get a continual revenue stream and you own nothing, not even personal listening rights, not even price stability. Variable pricing also benefits the record companies because their model is based on over-hyped releases. Couple to the extremely limited playlists that Clear Channel stations play (as a consequence of record company promotions).
As for a viable iPod competitor, it's hard to understand why Sony and the others have failed so badly. Some of their products are decent, but none are easier to use than an iPod. It's true that the iPod benefits enormously from the hype surrounding it, but if there was a truly technologically more advanced competitor, the iPod range would lose a lot of lustre. Instead, it seems that iTunes sales are going from strength to strength - as is the volume of the whining from the record companies..... Apple must be doing something right.
Permalink to Comment2. John on August 22, 2005 04:45 PM writes...
Why do you assume they want to lower prices? Knowing how greedy they are, the more believable rumor is that they want to increase prices up to $2 per song on the latest releases, and then have advertising promotions all over iTunes to highlight sales (back to $.99!)
Yahoo just offered full song preview but some say that you have to watch an ad before you can listen. If so, then I bet the labels are charging Yahoo for that privilege. I think Apple would like to offer full song (or even 1 minute) previews for free. Who do you think is stopping that?
Permalink to Comment3. BW on August 22, 2005 04:50 PM writes...
I have to disagree with Jim here, on the issue of needing a better product in order to beat iPod. I think a good chunk of iPod's success is not just relative ease of use, but 'cool factor' and most importantly its dominant position.
iPods don't sell just to tech geeks like us. They also sell to people so technologically illiterate they need their kids or boyfriend/girlfriends to load their playlists for them. And for those people, cool factor, ease of use and market dominance are key. They *don't* want to buy a new and better one next year, they *are* reassured by a solid brand and they are *deathly* afraid of upstarts for the simple reason that they don't want to end up owning the mp3 equivelent of a betamax VCR. They don't want to be the loser who can't get anything in that format a year from now, and they *definitely* don't want to spend hundreds or even thousands of dollars on music that they effectively lose once that device or format ends. Granted that's ignoring the pace of technology, but for a lot of people they still won't accept that a new computer every two years makes sense, let alone a new music player.
There have been better players for less money than the iPod. I saw a couple I really liked, but I never bought one. It's just as well, they all failed. Short term I think only Microsoft has ability to make a hardware/software combo (a la x-box) that could kill iPod. But then I doubt they will given their current freedom from anti-trust problems.
Long term, iPod will die to unified phone/PDAs once wireless bandwidth is really cheap (or unlimited for a fee) and phones capable of securely storing a crazy ammount of songs. Maybe Apple sees it coming and will have the ability to morph iPod into that. If they do, they should keep winning in my opinion, as their consumer demographics is wider than just tech people, and certainly miles wider than their customer base for Mac computers. Those people, the ones who don't like and don't dig a lot of new technology but for whatever reason bought an iPod, they're a cautious cushion that makes Apple's position just that much more secure.
Permalink to Comment4. James Bailey on August 22, 2005 05:31 PM writes...
The reason Apple is dominating the online music landscape is simple but not obvious. The simple reason is that Apple is the only online music vendor to support both Macs and Windows.
I know this isn't obvious. People get blinded by market share numbers but no one considers what those numbers really mean. Sure, in business environments Microsoft windows is 95% of the market. But we are talking about consumer technology here.
Apple is the choice of many creative professionals. They have an approximate 4% market share in general but that number doesn't take into account Windows machines in a large number of roles that will never be used to buy music. Servers, Point of Entry terminals, Kiosks, and many business computers that are completely locked down in their environments to do only what the corporate masters require.
Now consider, Macintosh computers are never in those situations. Every sale goes to either a home user or a creative professional. Pretty much every machine is a target for selling online music. This puts the market share for Apple computers in closer to the 15% range (purely an educated guess) rather than in the 4% range.
But that ~15% is over represented in the total target market as well. First, Apple has the first mass market success of a portable MP3 player in the iPod. Obviously Mac users are very aware of this development and have been buying music online for longer than any other group. That means that Apple users are disproportionally represented in the online music market.
So what are the odds that a online music store that doesn't work with a Mac is going to take away market share from one that does and also works with the industry standard Windows operating system? The Windows solution leaves out 10% to 20% of the target market before you even begin. There is NO chance that Mac users will even consider a Windows only solution. And the first mover advantage of Apple is going to be hard to overcome for any reasonable percentage of Windows users as well.
BTW, Apple has the numbers from its online store that could verify my supposition about online music v. OS market share numbers but don't expect Apple to help out here. I'm pretty sure they consider Mac users a strategic asset :)
Permalink to Comment5. Joe on August 22, 2005 07:58 PM writes...
I don't understand the argument. Is it Apple's fault that no one is buying "play for sure" products? That seems to be the argument. All those products are out there. People can purchase them if they wish. No one is stopping them from doing so. Consumers are choosing the iPod. That may change. This seems like politics from the competitors & their toadies. MS is having a problem, at this point, competing in this space...so Apple should give them a handout. Seems like a pretty lame argument to me. Every PC owner on the planet can download music from any of these sites now. Yet they don't. How will Apple changing it's business model to accommodate MS benefit Apple? Would MS do this if they were in the same position? NOPE.
Permalink to Comment6. Peter on August 22, 2005 08:10 PM writes...
First, I'm very amused with the music industry. Yes, they say "This is what we want to do" and Apple is supposed to roll over and say, "Yes sir! We'll do that right away for you sir!" Where's the compromise? Needless to say, from what the music companies are saying, they're the "reasonable" ones and Apple is not.
The flexible pricing I can give to the music companies. After all, they own the content and they have every right to tell Apple how much to charge for it. So, yeah, if they want to charge $3.00 per track for the latest and greatest single from Britney Spears, that's their prerogative.
But the iPod?! Come on! That's the equivalent of the music companies saying, "We won't sell you any music unless you make your Macs run linux." It's none of their business whether Apple wants to tie the iPod to iTMS or not. If I were Apple, I would tell these guys to mind their own business (no pun intended).
That said, I do believe that Apple should support WMA on the iPod. Way back when iTMS was first introduced, Steve Jobs commented that "At Apple, it's about the music." It shouldn't be about the format. iPods should play the widest variety of formats--MP3, Ogg, Real, WMA (protected and unprotected), AAC (protected and unprotected), WAV, Apple Lossless, and anything else that comes along. Because it should be about the music, not about the format.
No, this doesn't mean that Apple should include Napster with each iPod sold. No, it doesn't mean that Apple should protect music purchased from iTMS with Windows Media. Heck, if AAC/FairPlay is so great and the iTunes Music Store is so awesome, why would I want to use Napster?
Permalink to Comment7. david on August 22, 2005 09:42 PM writes...
There are 4 reasons for Apple's success with the iPod and together I think they create an almost insurmountable challenge for other companies.
1) Hardware
The iPod is well designed physically. It is easy to use and muscle memory allows one to use it without looking. The screen is easy to read, the menues logical. Music is easily found and On The Go Playlists allow the user to create playlists on the fly easily. People can talk about better mp3 players but the truth is while some can match or even exceed some part of this equation, none of pulled it off completely.
2) Software
iTunes is just plain good software. Music can be cataloged, organized, collected, and prepared for the iPod. There is room for improvement and Apple hasn't been sitting back. Playcounts, last played, ratings, and smart playlists work together to make interesting playlists possible, as does the party mix.
3) Syncing
If you can't get the music from your computer to your mp3 play the game is over. I have never seen consistently problem free syncing with any mp3 player other than the iPod.
4) Music Store
Yep, we all know that CDs can be ripped (at least for now) and iTunes makes it easy. But the iTunes Music store is as simple as it gets. Music can be found, purchased, downloaded, and synced with just a couple clicks of the mouse. But every digital store should be able to pull that off - I say that knowing full well that many don't.
But the real power of Apple's music store is consistency - and I'm not talking price. Every track downloaded from the Apple store plays by the same rules. It can be played on the same number of computers, on any iPod owned by the user, every track can be burnt the same number of times. We know these rules from reading them once. This is NOT true of other music stores.
And actually there is one more obvious advantage for Apple - one so obvious that it is easy to miss it. If an iPod user has a problem he has one phonecall to make. Is the iPod broken? Call Apple. Is there a sync problem? Call Apple. Is the software acting up? Call Apple. If your purchased track won't play...yep. Call Apple. In the world of "Plays for sure" who will take responsibility for the consumer's problem? That's right, "Nobody's sure"
Permalink to Comment8. Anthony Frausto on August 22, 2005 10:39 PM writes...
The record companies want one thing and one thing only: more profit. They may coach their words in fair, flexible and open market terminology but the truth is they are ultimately concerned about their own wallet -- just like any other business industry. And there is nothing wrong with that.
But record execs and Apple iTunes competitors -- including Microsoft -- would gain a lot more respect from consumers if they would just be more honest about what their real concerns are about Apple's lock on the market, instead of acting like they would be doing different if they were in Apple's shoes.
These companies forget that we consumers are living in a post-911 world and a post Iraq War 2. Both of these events have sharpened our eyes in this world, and we prefer to see things 'straight-up' for what they are -- not what they are pretending to be.
The "competitors" and "detractors" of iTunes and the iPod are the real losers here not just because they have failed to even catch up, but because they spend too much time and energy labeling us...as 'lemmings' or members of the iPod Cult -- or whatever -- instead of realizing that perhaps we love the iPod and iTunes so much because it gives us exactly what we want: digital music simplicity and coolness with a huge doze of comfort knowing we are buying into the de facto digital music industry standard.
Permalink to Comment9. Tim on August 23, 2005 07:58 AM writes...
we don't have iTMS in Australia, Sony BMG are hoping to extract the concessions from Apple here in Australia that Apple haven't conceeded anywhere else. The problem for Apple is that Sony BMG own a huge percentage of popular local music content.
Permalink to CommentMeanwhile, Sony, along with ARIA, complain that p2p downloads are robbing them of revenue. ARIA say on their website that they're heartened by the 10 fold increase in online music sales around the world... and that they look forward to that happening here too.
Nowhere do they admit that the only reason it hasn't taken off -- and the only reason I'm unable to legitimately purchase music online for my Mac/iPod -- is because they're holding out!
10. Glenn on August 24, 2005 07:02 PM writes...
Re: Flexible pricing,
Your analysis of flexible pricing misses the point, in my opinion. Lowering some prices isn't about short term gain, and I wouldn't worry about angering a customer who bought an album for a higher price (it happens every day in every product category -- it's just a fact of life). Allowing for flexible and tiered pricing structures will encourage competition and create better online stores.
Price is marketing tool, and a powerful one at that. When all albums cost the same there's no ability to use price to set yourself apart. Labels often drop the price of a new album by a developing artist. The label and the artist need sales to get the ball rolling. Adjusting down the price is an incentive to buy that album. The customer saves money, Apple gets a sale (and doesn't lose its shirt because the discount will be paid for by the label) and the label and band get a much needed sale. Albums are routinely sale priced for the first few weeks of their release. Online stores miss out on that competition. There's no reason a CD should cost less than an album download, but they often do because iTunes' pricing structure is so rigid.
Also, I think it's horrible that iTunes charges the same for a brand new album as it does one that's 20 years old. There's no difference between new releases and older catalog titles -- and there should be. Labels should be able to set lower prices for older albums. Consumers should insist upon lower prices for catalog titles. Impulse purchases will increase and overall sales will as well.
I'm sure some labels would want to raise the price of hit singles. In that regard iTunes' uniform pricing is good because it sets a ceiling. The problem is that in setting a ceiling it also sets a floor, and they're both the same price. That floor needs to drop for online stores to mature and compete.
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