February 15, 2007
Digital sales may be playing a swan song
KEVIN MANEY, USA TODAY

The online digital music business stinks.

ITunes, Rhapsody, Zune Store, Napster - you name it. They're all failures.

The hype has people believing otherwise. Bloggers, tech writers and your friends who know more about computers than you do shout that iTunes is the best thing to happen to music since the microphone. Or maybe psychedelic drugs.

But it's just not true. Nearly six years after the introduction of iTunes and the iPod, online music has failed to interest the vast majority of the world's music consumers. Which is no doubt why Steve Jobs recently called for an end to copy-protection software on digital songs. Something has to change, or iTunes and its ilk will never break into the mass market.Jobs admitted that iTunes' penetration has been weak. In his discussed-to-death essay, "Thoughts On Music" - posted a couple of weeks ago on Apple's Web site - Jobs noted that only about 3 percent of songs on a typical iPod are bought on iTunes. The rest are either ripped from CDs and transferred into iPods, or illegitimately downloaded for free off file-sharing sites such as Kazaa or eDonkey.

The reality for iTunes might not even be that good.

In a report released in December, Forrester Research said it did a strenuous, independent analysis of iTunes purchases. It found that just 3.2 percent of all "online households" - homes that have computers and Internet connections, a subset of all homes - made an iTunes purchase over a one-year period.

About 10 percent of buyers purchased just one track during the entire year. About one-quarter of buyers spent $5 or less for the year. Most iTunes users, Forrester says, own fewer than two CDs' worth of iTunes music.

Really, it's as if tens of millions of people each had a big honkin' refrigerator, and put a quart of milk in it a few times a year.

Worse for Apple, Forrester found that the number of monthly transactions per iTunes household was declining in 2006. "It is too soon to tell if this decline was seasonal or if buyers were reaching their saturation level for digital music," the report says.

Apple rebutted Forrester's report, saying that iTunes sales continue to grow. But Apple did not offer specific numbers to counter Forrester's. Jobs' music manifesto certainly confirmed that consumers - people who already bought iPods, for Pete's sake - are simply not buying many iTunes songs.

It's not just an iTunes problem. In January, the International Federation of the Phonographic Industry - the global bureaucracy guarding music copyrights - said that online music sales in 2006 "nearly doubled." Which sounds amazing. Until you get to the part where the IFPI says that sales had tripled in 2005. So the growth rate had slowed.

"Downloads, as a business model for digital music, has failed," Dave Goldberg, VP of Yahoo Music, told a crowd at Digital Music Forum West late last year. "When you look at people who are buying downloads, it is older people who have money and time, and people who are doing it through gift cards."

How about subscription services, like Rhapsody and Napster? Not much joy there, either. Rhapsody reportedly has about 1 million subscribers. The rest, all together, have about another million. That's an audience share that approaches the 0.7 rating Animal Planet got when it aired "Puppy Bowl III" before the Super Bowl.

It's certainly not that people don't want to buy stuff on the Internet. Amazon.com's sales soared in 2006. Blue Nile is thriving selling diamond jewelry, and eBay sells millions of cars. Getting people to buy songs ought to be a snap.

And people want music. The Grammy Awards on Sunday were a giant celebration of music's popularity. People listen to more music in more ways than ever.

But for the majority of people, downloading songs is too hard and too frustrating. Some of that problem is the digital rights management (DRM) software that limits where and how songs can be played. It makes iTunes songs playable only on iPods, Rhapsody subscription songs playable only on certain devices, and so on.

The record companies believe DRM keeps people from pirating music, which may or may not be true. But DRM definitely keeps people from buying online music. As Jobs says, if consumers could buy music from any online store and play it on any device, the entire industry would thrive.

"The more you try to control music, the more you limit business opportunities," says Steve Waite, author of the book "Quantum Investing" and a professional musician.

Or as music artist Moby told me last week, "Personally, I see 2 percent of DRM as protecting copyright and 98 percent annoying consumers."

There are other reasons downloads are stalled. People who grew up with CDs - or vinyl LPs before that - like the packaging and cover art, and like to get songs deep in an album that are not hits but grow on you over time. At 99 cents a song, digital downloads don't offer enough value to give up the packaged CD niceties.

Especially when pirated music is so easily available for free.

If digital downloads are going to take off, they probably need to be DRM-free, simpler to buy and much cheaper. Then again, that will only happen with the record companies' blessing, and since they get 90 percent of their revenue from CD sales, maybe they just don't care about taking digital downloads to the mass market.

I guess we'll find that out if record label EMI, as rumored, decides to sell songs with no DRM.

After Jobs released his essay, I asked Apple spokeswoman Natalie Kerris why he chose to do it at that time. She said there was no particular reason. But Jobs never does anything for no particular reason. He manipulates the media and timing better than anyone in tech.

More likely, Jobs realized it was time to save iTunes.

The article didn't mention perceived value. 99 cents is far too much to pay for a downloadable file (hell, that's CD-A quality price).

allofmp3.com (RIP) had the right model, let the consumer decide how much to pay based on quality desired (& at pennies per MB, the price was certainly palatable)

oh well, the faster RIAA member companies go in the red, the faster these ridiculous lawsuits will come to an end.

It's no big secret that the cartel doesn't want legitimate download sites to succeed.

They needed to give the appearance of offering digital music, so they allow sites to sell songs for a buck apiece. We all know that's too much to pay for digital offerings, and the consumer speaks to that by not buying it.

The cartel then takes the poor numbers and trots out the stats to "prove" that digital music services won't work, because consumers would rather download "illegal" music.

They can choke on it. The downward spiral continues.

It's quite simple, really: sell the tunes at pennies a pop, and people will buy it in droves. The volume will make up the difference.

Won't work; makes too much sense.

The only problem is that the author simply ignored the basic facts, didn't bother to look them up or is simply a moron. Typical USAToday reporting, combined with misleading conclusions from Forrester.

"Apple rebutted Forrester's report, saying that iTunes sales continue to grow. But Apple did not offer specific numbers to counter Forrester's."

Yes he did. Jobs' letter says that Apple has sold 2 billion songs by the end of 2006. They've been doing it less than four years.

Between 1982 and 2003 (inclusive), the RIAA reports selling 2.01 billion singles.

Do they expect Apple to resurrect the entire industry by selling songs one at a time?

The growth rate has slowed. Yeah, it only doubled last year. Such a tragedy.

"The Grammy Awards on Sunday were a giant celebration of music's popularity."

American Idol came in first in the ratings. And second. Significantly more people seem to prefer to watch the recurring amateur hour than the once-a-year Grammys.

The music industry is in trouble, no doubt about that. But Kevin Maney doesn't seem to have a clue as to why.

Too true.

I'd pay $2/song if it was a non-DRM, spam free, mpeg file of the music VIDEO with a high bitrate for the audio and near DVD quaility video.... not that crapola quaility of yahoo streaming...
$1 for a 128kb mp3?!? geeze I rip at 320kbs....

This article seems to intimate that people still buy CDs and prefer that format to digital downloads (many other studies have shown this is not the case, CD sales are declinign rapidly and ironically, the same group of wealthy 40 somethings that arfe buying itunes are buying CD's if you believe the hype).

The RIAA and similar bodies have proven themselves to be dinosaurs and numbskulls of the highest order because now it seems that not only are CD's not selling, but digital downloads are not selling either. That means a huge decline in sales and what are the RIAA and such doing about it? Instead of adapting their business models to try and recover the situation (i.e. sell downloads and CD's for less money, take away DRM on mp3 and CD and let volume of sales make up the difference) they continue to try and enforce more and more DRM with more rigid and less flexible controls and prosecute 13 year old p2p downloaders. How's that working for them - it isn't ....

It doesn't take a genius to work out a better solution to this problem. Stop paying out huge advances on albums, only let groups record if they already have a dozen songs downpat rehearsed and demoed on a computer daw or 8 track recorder etc, let them record it in 2-3 weeks in a smaller ProToolsstyle environment (album costs 35-50k to produce instead of half a million dollars), sell CDs so that 10 dollars including taxes is the take away price, and no more than 12 dollars for a back catlog issue,sell mp3 downloads in non DRM format at a decent quality bitrate (i.e. 256 Kbps or better) and have a scale that gives some discount for buying more than 1 tune, so if one song = 1.15, then each subsequent track is 15 cents cheaper, i.e. 2nd track = 100 cents, 3rd track = 85 cents, 4th track = 70 cents etc, 5th track = 55 cents. Total = 4.25 for 5 tracks as opposed to 4.95 for 5 tracks using the current system. Or buy 4 tracks and get a 5th one free, something to motivate, y'know?