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.

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.

Option 1: Apple backs down. Apple decides that selling content through iTunes is critical to the success of its assorted digital media devices. As all of the major labels, networks, and studios abandon the iTunes Store for alternate distribution strategies, Apple gives in and allows NBC et al. to set their own prices. After all, Amazon sells products for lots of different prices, and nobody finds it too difficult to use.

Why it won't happen: Allowing media conglomerates to set their own prices won't keep them from seeking additional distribution partners. And while Amazon might improve its selection of content, it's not likely to gain much footing with iPod users: At present, Amazon Unbox isn't even available for Mac users, and content can't be loaded onto iPods. Unless all of the major content providers strike deals with a single distributor, consumers will be forced to seek out music and movies across multiple platforms and services. The continued success of the iTunes Store in the face of a growing number of competing services suggests that most consumers would rather get their media from the single source with the best selection rather than from a dozen independent providers.

Option 2: The networks back down. Muttering under their collective breath, the networks resign themselves to selling content through iTunes in order to continue reaching Apple's user base.

Why it's likely to happen: The television networks and record labels will continue exploring alternate distribution channels that yield higher profits and greater control, but unless they're willing to put pride over profit, the networks can't afford to ignore or abandon iTunes.

Option 3: No one backs down. Apple remains committed to uniform pricing (which it will), and the networks remain committed to controlling the pricing of their content (which is probable). Convinced that the success of the iPod hinges on the availability of exclusive, desirable, accessible media content, Apple begins exploring new strategies that sidestep the existing industry structures altogether.

One such approach would involve Apple forming direct relationships with artists. Through iTunes, Apple could embrace the growing number of musicians looking to escape the confines of the major labels, a roster that includes Radiohead, Trent Reznor, and Madonna. It's doubtful that most artists would agree to release their work exclusively through Apple, but it's not hard to imagine an artist giving Apple an exclusive advance distribution window in exchange for placement in an iPod commercial, a tour sponsorship, and a higher share of revenues than the labels and networks are willing to offer. And while it's outside of its current business model, Apple could even invest in saving fan-favorite television shows from cancellation: Imagine iTunes as the exclusive distributor for Arrested Development, Firefly, or Veronica Mars.

If the networks turn their backs on iTunes altogether, Apple could also retaliate by moving to a service-based approach. The company has already released a networked set-top device called the AppleTV that allows users to stream photos, music, and video content from computers to a television set. Thus far, response to the AppleTV has been lukewarm, but Apple could change this with a single, simple move: Introduce DVR capabilities.

By letting people record any television content they please and load it into iTunes and their iPods with one-click ease, Apple could avoid having to cut deals with anyone. The company could even sweeten the pot by leveraging its online services and allowing users to save any recorded show to their .Mac accounts, making their favorite television broadcasts accessible from anywhere. Would Apple take such aggressive action against the networks? That's hard to predict, both because Steve Jobs sits on the board of the Walt Disney Co. and because such an approach could damage Apple's ongoing relationship with each network's affiliated music labels. But from an audience perspective, this would be a fantastic outcome, and one that would go a long way toward restoring Apple's flagging reputation as a champion of consumer interests. Networks take note: Whether they sell your content or give it away, Apple's not going away.

Ivan Askwith is a lead strategist with the creative agency Big Spaceship and an adviser to MIT's Convergence Culture Consortium.