p2pnet.net News:- The trouble with most news services everywhere is that we all thrive on bad news, and so when Apple iTunes launched in the three biggest countries by music purchase, in Europe last week, Germany, France and the UK, most coverage was hijacked by writers giving room for knocking copy.

Wippit was keen to say that Apple iTunes was great for people rich enough to have the latest PC, an iPod and a credit card, but its own clients were enthusiastic kids that paid for their music through SMS billing on their mobile phones.

Well that’s alright if you can afford a mobile phone.

Other detractors harp on about the proprietary AAC music format (which remember is part of a standard), and still more that it would be commercial ’suicide’ for any independent record label to sign with iTunes in Europe. The UK Association of Independent Music is said to be angry that Apple won’t negotiate better terms.

Finally US analysts have questioned Apple’s pricing, wondering why it was so much more than the 99 cent pricing in the US.

Faultline would like to come down heavily on the side of the Apple way of doing things, and especially the way that it resisted the immense pressure that it was under to put music out that was even more expensive.

Last month US newspapers kept running ‘exclusives,’ that insisted that the record labels would force Apple to raise it price when its deal was renegotiated after one year, due soon.

Roxio’s Napster went and priced tracks at £1.10 ($2.00) at its UK launch, but it went barely noticed. No-one complained because noone plans to use it. Apple went for 79 pence or $1.43, still quite high, but then again, it is more or less in line with the hike music usually has applied to it as it crosses the Atlantic.

(Actually much of this doesn’t cross the Atlantic as it is music that was cut here by UK bands, from UK labels like EMI, that still cost more in the UK).

When the French and German price was announced by Jobs at 99 Euro cents ($1.20) the 600 or so, mostly French and German, press contingent actually applauded, so clear were they that this was an outright victory for both sensible pricing and for Apple. And it is.

Though it does raise a question about whether or not within the European Union countries, it is legal to offer a territorial offering at a differential price (the record companies have been doing it for years, but that doesn’t make it legal).

The event was another chance to think over the logic of just what it is about Apple iTunes that has made it take off.

Steve Jobs, came out onto the stage like a rock star, unannounced. There was no fanfare, there had been no indication that he would be there, but we were all just expected to know who he was, and everyone did.

He just came out and said that iTunes had now shipped 85 million tunes, and had a 70% market share of online music services. That’s not a figure that other services will agree with, but it’s also one that’s hard to pin down, given that Rhapsody is a subscription service and that Roxio hasn’t given out numbers. But it is believable.

Jobs told the story as if we had been a fly on the wall when he and his advisers had been working out the logic to iTunes. ‘The competitors aren’t Napster, Music Match and Rhapsody, they only have 30% of the market between them, it’s piracy that we’re competing with.’

‘How many of you have downloaded pirated music illegally,’ asked Jobs, and put up his own hand. ‘Just once,’ he said, ‘call it market research. And do you know what I found? That the downloads are unreliable, the encoding is unreliable, that it takes forever and there’s no cover art, and oh yeah, it’s stealing.’

And then he detailed the key elements that Apple had decided would make the difference, starting with fixing all of those problems. Then he said that iTunes also had to offer a service where you own the song, not have a subscription where if you failed to renew ten years from now, you lost all the music that you’d paid for over all those years.

And if you own a song, you should have landmark personal use rights. Customers should be able to burn it to as many different CDs as they like as long as it’s for personal use, and it should run on all of the computers they use, not just one, and it should run on any number of Apple made personal music players, iPods. He didn’t mention that it might also reasonably be expected to run on other makes of portable music players, because it doesn’t. But there’s a good reason for that.

It was also vital that computers (Apple is currently limiting us to 5 computers for a track to play on) can be authorized and deauthorized easily, so that when you get a bigger PC or a new PC, you can move your record collection to it, and not lose it.

Another key element according to Jobs was that the distribution was NOT a web site. ‘We’ve seen web sites with downloads, and they just don’t work well,’ said Jobs. ‘It’s important that the piece of software that plays your song is a juke box and that it should behave like a Juke Box and that it is also the same piece of software that is

used for downloading, not a different piece, because we’ve seen people downloading music and then trying desperately to feed it into their juke box.

‘iTunes is a beautifully written piece of Windows software. Some people say it’s perhaps the best piece of Windows software ever written. How ironic is that?’ Now Jobs was just playing up Apple and playing with the audience.

But we haven’t seen any other services following each of these rules laid down by the market leader, and until we do, it is unlikely that anyone is going to challenge Apple’s lead in online music.

Jobs carried on in this manner, moving through the more recent innovations on iTunes, the iMix playlists on the iTunes web sites, celebrity iMixes, the Air Express wi-fi that plugs straight into your stereo, the ability over a wi-fi connection in a hot spot to swap playlists with perfect strangers, just by keeping them open and using Rendezvous software but, of course, without actually copying each other’s songs – they are just streamed. Jobs also mentioned that there were over 5,000 audio books on iTunes too.

He promised a Pan European store by October and told us to watch the automotive spot, where Apple would move later this year. iTunes and iPods between them offer a way to listen to music most everywhere, the car is the last bastion, and Jobs aims to fix that soon.

Jobs then took a break while 5 times Grammy winner Alicia Keys played a few songs live and got the audience swinging.

During his presentation Jobs pointed out that the iPod had now sold over 3 million players and held a 50% market share in portable music players, ‘and that includes everything down to $50 Flash MP3 players,’ he said.

It really is here that Apple makes its money. It takes little genius to realize that iTunes has generated $85 million of music purchases so far, in roughly a year. But iPods have managed 3 million sales, more than 2 million of which are during the past year, at an average retail price of more than $250. That’s a huge half a billion dollars in iPods

this year at retail, more than half that for Apple directly. He then showed a graph that looked roughly like this.

In an interview with the Wall Street Journal last week Jobs said that he felt that online music was about 2% of US music sales, but that over the next two years it has the potential to move to 5%. Applying a straight correlation to the number of tracks that Apple might sell in the US, this suggests that about 210 million tracks will be sold next year, with Apple, if it maintains a 70% market share, selling almost 150 million of them, with a resulting $150 million of revenue.

The year after, this becomes about 303 million track market, with

Apple selling around 210 million of them, if it continues to maintain market share.

In every market that Faultline has followed over the years, the early market leader rarely falls below 50% market share unless there is an unprecedented piece of anti-trust, or they fumble the ball. And all of that is just music purchases in the US. Europe adds another 23% of the world market and if Apple does as well here, it could potentially add 50% to that number, to say 300 million tracks sold by Apple within two years. What happens after that is anybody’s business.

But if the music is a drop in the ocean now and iPod is where Apple makes its money it will be even more true in two years.

If Apple continues with its share of the portable player market and if that market grew at the same rate as the online music business, it would ship 3.5 million devices next year, 5 million the year after in the US, and if they took off as rapidly in Europe it might be as high as 5 million next year globally and over 7 million the year after.

At current prices Apple’s music business could be as high as $2 billion at retail in two years. And that’s without Air Express or any extra new innovations that Apple comes up with.

This is highly possible and if it doesn’t happen for Apple like that, it will be because it took its eye off the ball. But even so will it really have solved the piracy crisis in music? No of course not.

The entire assumption for these numbers was based on raising online to be 5% of music. The record companies have lost a lot more than 5% over the past three years of piracy, and we expect that Jobs hopes for momentum that’s even greater than this.

Without greater success than this piracy will still be eating at the heart of the recorded music business and the music business is unlikely anyway to recover quite the dollar volumes that it had back prior to 2000.

But the online music business is no good to anybody until it threatens to become something closer to 30% of all music sales, and for that to happen is going to take the rest of this decade and perhaps some of the next. So Apple has some way to go yet before it can claim a final victory as the Amazon of the industry, but at the same time, it has plenty of revenue growth to come if that level of penetration is the aim.

Finally we were reminded by the press of Jobs responding to a question when asked about a video iPod, when he said, ‘It’s the music stupid,’ mimicking the comment from Clinton’s era when he said, ‘It’s the economy, stupid.’ By which we are sure all he means is that today he’s talking about the music and once he’s fixed that, then he might look at video.

Quite clearly to waste a lead taken by Apple in online music services, by not accepting that the television and film industries are both bigger and within its grasp, and that the resulting online business will be so much bigger than music, would be criminal.

But Apple is always a company that has put its trousers on one leg at a time. Had it rushed, like Sony and Napster seem to have done, and launched before it was ready, iTunes would be a mess.

Chances are it rushed this European launch (it won’t comment on that) to come out as soon as possible after Napster UK. But a European launch on an established formula is not the same as an initial product launch.

So we don’t expect Apple to be first into the portable DVR market (there are already two players out there to our knowledge) but that doesn’t mean it won’t join the market and potentially dominate it once it is ready to go.

Peter White – Faultline, UK

This entry was posted on Thursday, June 24th, 2004 at 3:04 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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