iTunes gets TIME's nod

iTunes is TIME Magazine's Invention of the Year, and has a great summary of the basic economics at work:

Enter [Steve] Jobs. Back in April, Apple's ceo revealed that he had spent the previous year negotiating an unprecedented deal with all five major labels and thousands of independents. His iTunes software, which had previously been nothing more than a place to store and play digital music on a Mac, would become a gateway to the Music Store, where you could easily find and save music to your hard drive, CD or iPod music player�no subscription necessary, just 99� per song, or $9.99 for an album. Competitors tried to match that price but couldn't come up with a service as free of restrictions. They said Jobs had been given a sweet deal by the labels because Apple, with its miniscule share of the computer market, was never going to be a real distribution threat. "The Mac world is a walled garden," said BuyMusic.com vice president Liz Brooks. "The PC environment is like the Wild West."

Then came iTunes for Windows, and suddenly there was a new sheriff in town. Not content with creating a music store for PC users that was a perfect clone of its Mac counterpart, including all of the 400,000 songs Apple now has the rights to resell, Jobs added a couple of cool new features, the best of which was a monthly allowance you can set up for your kids to govern their online purchases�a godsend for any parent trying to curb an offspring's downloading habit.

Jobs has one more reason not to be concerned about the competition. "The dirty little secret of all this is there's no way to make money on these stores," he says. For every 99� Apple gets from your credit card, 65� goes straight to the music label. Another quarter or so gets eaten up by distribution costs. At most, Jobs is left with a dime per track, so even $500 million in annual sales would add up to a paltry $50 million profit. Why even bother? "Because we're selling iPods," Jobs says, grinning.

That may make iTunes the most benign-looking Trojan Horse in software history. The Windows crowd can get iTunes free, and it offers almost all the same functionality as the paid versions of MusicMatch and Real One, two PC-based rivals. But iTunes is the only music application that will work with the enormously popular iPod, and it has features�like its powerful search function�that are unrivaled. "Once people are locked into using iTunes, the game's over," says Charles Wolf, an analyst at the New York City� based Needham & Co. investment bank. "They could sell an extra 2 million iPods because of this." And the margins on these devices make the Music Store's arithmetic look like child's play. Each $499 iPod returns as much as $175 in profit, Wolf says.

Note that this is the mirror image of the cell phone industry, where they give away the hardware and charge you for the service. The reason the finances work outthis way is ultimately because of the RIAA's greed - how much of that 65 cents do you think goes to the artists?

On the whole, I like iTunes, and I might even get an iPod someday. But I won't ever use the Apple Music Store, because of the simple reason that I will not use a proprietary and restricted file format such as AAC or play by the RIAA's skewed rules. The TIME article does not mention explicitly the implied fact that the Apple Music Store is largely irrelevant to the business model, amounting to nothing more than iPod marketing. ITunes is far more important - and since it works with my existing MP3 collection, it has all eth functionality I need. And that's largely going to be true of most PC users.

Is this a revolution in portable music? yes. Is it a revolution in the music industry for consumers? NO. In fact, by leaping into bed with the RIAA, Apple has taken the issue of fair use a step backwards, by giving the RIAA more control and more profits, both at the expense of the artists.

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