iTunes: Music Retail's Friend or Foe?
The music store's launch in 2003 was more about enhancing the appeal of Apple's iPod, but now music sales are arguably less important than the company's ability to sell hardware.
NEW YORK -- Opinion in the music business is still split between those who think Apple saved record labels just when it looked like Internet piracy was about to overwhelm them and others who think the company did lasting damage to the music business by its insistence on letting consumers buy just the songs they wanted.
In truth, though, Apple's impact has never been as cut and dried as either argument makes it out to be.
Yes, the launch of the iTunes Music Store in 2003 was more about enhancing the appeal of the company's lucrative iPod product line than it was about selling music. But today, iTunes' music sales are arguably less important than ever to Apple's ability to sell hardware now that it's focused on the iPhone, whose app-centric functionality moves far beyond the mere ability to listen to digital music on the go.
And while iTunes' pioneering ease of use demonstrated once and for all the viability of the digital marketplace, its success has come at an enormous cost to the recording industry, which has ceded to Apple a degree of leverage unprecedented in music retailing.
Billboard estimates Apple accounted for a staggering 33 percent of U.S. recorded-music revenue in 2010, dwarfing second-place Walmart at 10.1 percent and far exceeding the market share of any previous music retailer.
Because of iTunes' unparalleled ability to sell music, major labels shower it with exclusive early-release windows and bonus tracks. While that makes smart business sense in the short term, the long-term risks associated with such a strategy are enormous because they concentrate more power in the hands of the market's dominant retailer.
iTunes' pricing structure and its demand that all individual tracks‹not just singles‹be made available for sale has changed the labels' business model, forcing them to learn how to make money on track sales that bring in 70 cents instead of on album sales that previously had wholesale prices of about $12.
Consequently, the No. 1 worry for label executives nowadays is how much revenue they derive from what kind of sales. What percentage of sales will come from the album? How much will come from digital tracks? Will track sales cannibalize album sales? Soon, those concerns could be replaced by worries over whether subscription music services are hurting music purchases, but that doesn't appear likely anytime soon.
Apple has changed every aspect of the music business, right down to its jargon. Instead of just talking about initial shipments or price and positioning, label executives also want to know whether their top-priority releases have received prominent placement on iTunes' home page. For many years, the biggest marketing worry for labels was whether their priority albums were highlighted in the influential Sunday circulars of Best Buy and Target. Now equally important is what kind of look a new release gets on iTunes. Executives are known to stay up until midnight on Mondays to see how iTunes is merchandising their albums and in how many places.
iTunes' unique approach to merchandising has fulfilled one longtime fantasy of label executives: It won't accept cooperative advertising dollars, so an album's price and position in the store can't be bought. That has helped level the playing field for independent artists, particularly those whose music catches the fancy of iTunes' editorial staff, which can result in prime placement on iTunes' home page or its weekly New Music Tuesday email.
Instead of cooperative ad dollars, bonus content and exclusive selling periods are the coinage of the Apple realm. It's still a form of barter in that if a label provides iTunes with a deluxe version of an album ahead of other merchants, it can depend on securing valuable real estate in the store.
Apple's impact on album pricing has been significant as well. While Best Buy and Target have been pounding the $9.99 price point in its circulars for the last 20 years, iTunes' adoption of the price finally cemented it as a ceiling in the minds of consumers, requiring labels to rethink their pricing strategies for physical product.
In some ways, iTunes often serves as a crystal ball for labels. If an artist performs on the Grammy Awards or "The Tonight Show With Jay Leno," labels find out quickly‹often within 24 hours‹whether they have a hit on their hands.
But in other ways, iTunes can muddy the waters for label executives trying to forecast first-week sales and set initial CD manufacturing requirements and shipments. Label and distribution sales executives start as always with a first-week sales projection and a one-year forecast for an album's sales. But then they face the question of what percentage of sales will be digital, which affects how many CDs should be manufactured. As iTunes continues to grow, label sales prognosticators have to keep tinkering with their formulas.
Now that iTunes is rolling out cloud-based features as well, that tinkering is sure to continue, as is a refrain often heard in the hallways of record labels: "Why wasn't our album on the home page of iTunes?"