What's the future of iTunes?

Innovation, the Internet, gadgets, and more.
Oct. 17 2007 12:37 PM

Apple vs. Everyone

Every media conglomerate wants to start its own online venture. Will iTunes survive?

Illustration by Mark Alan Stamaty. Click image to expand.

Since the iTunes Store opened in 2003, Apple and the world's top media companies have happily shared the profits from consumers' increasing appetite for downloadable songs and videos. This summer, the four-year honeymoon ended. In July, Universal Music Group announced that it would be downgrading its licensing contract with iTunes. Universal then revealed late last week that it has been in negotiations with other major labels to launch a rival service. Two months ago, NBC announced it would be pulling the network's shows from iTunes and relocating to Amazon Unbox. And in the last two weeks, Radiohead sidestepped both iTunes and the major record labels by allowing fans to purchase its new album online for whatever price they choose. Does all this mean that Apple's dominance of online media is coming to an end?

Not just yet. Despite the recent defections, Apple's iTunes Store is still responsible for a staggering 75 percent of online content sales. While the store's content might belong to labels, networks, and studios, the consumers still belong to Apple, whose iPod + iTunes combination has yet to be challenged by any competitor.

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At the moment, it's hard to tell who needs whom more. Universal Music provides Apple with access to one out of every three new albums sold in the United States. At the same time, online sales through venues such as the iTunes Store provide a substantial percentage of Universal's revenue—15 percent worldwide, or $200 million, during the first quarter of 2007 alone. At first glance, NBC's situation seems more one-sided. While the network's programs account for around 40 percent of Apple's television sales, online sales do not yet provide a significant source of the TV network's revenue. iTunes, however, has proven it can deliver new audiences to struggling network programs: NBC itself has credited iTunes for the success of The Office, which was slated for cancellation until network executives saw how well it was selling online.

NBC and Universal have both stated that their short-lived marriages with Apple collapsed due to irreconcilable differences over pricing. Apple claims that NBC wanted to raise the price of its programs, while NBC says that it wanted to lower the price to 99 cents. Whomever you believe, the fact remains that content providers have been pushing Apple to loosen up its pricing restrictions, and Apple has refused.

Regardless of demand, each song on iTunes costs 99 cents, each television program $1.99, and each feature-length movie $9.99. Most consumers are likely to agree that iTunes' pricing seems illogical; there's no obvious reason that Vanilla Ice's "Ninja Rap 2" should cost the same as the newest tracks from Soulja Boy. For content owners, this is more than illogical: It's bad for business.

Why does Apple stick with fixed pricing? Market analysts generally say that this is because iTunes sales are a means to an end, where the end is selling iPods. As such, Apple's interest is ensuring that desirable content for the iPod costs as little as possible. If this were Apple's only consideration, however, we have to assume it would have agreed to NBC's alleged request to halve the price of its television shows. It's also possible the company simply doesn't want to mess with its quiet but consistent income. The more likely explanation, however, lies with the company's obsession with simplicity. ITunes has been a huge success because it's easy to use, and (at least for now) has the most digital content of any online store. Apple's refusal to budge on pricing indicates it's prepared to defend simplicity at the expense of selection.

Even if Apple did everything the networks wanted, iTunes wouldn't control the digital media market forever. The success of the iTunes Store has proven that there is a significant market for buying songs and videos online. That fact hasn't been lost on content owners. Variable pricing might have kept NBC onboard, but that doesn't mean NBC wouldn't have also partnered with Amazon, MSN, and a thousand other resellers. Most of NBC's top-rated programs are already available as free, ad-supported streams on NBC.com. The network also plans to offer shows through NBC Direct, a forthcoming downloadable video client, and Hulu, a joint initiative with News Corp. that's set to begin beta testing later this year.

So, who needs whom more? Will iTunes bleed customers if it doesn't sell the most popular shows and albums? Will NBC learn that iTunes users will shrug and buy something else if they can't find The Office? Let's play out the three possible outcomes.

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