Pause, play, purchase: a case study on iTunes

Originally written April 9, 2019

Music is meant to be shared, to transcend boundaries and overcome limitations. On the other hand, the distribution of music as a commodity faced a fair share of the exact opposite. A phase of prohibition and ownership battles ensued as the world began transitioning from physical towards digital forms of media consumption. The record industry, a core component of the overall music industry, was turned on its head. How did the digital disruption propel Apple forward with their introduction of iTunes? Despite declining sales and an influx of anonymous piracy, iTunes prevailed as a fresh force in the market from its introduction at the beginning of the century to nearly a decade later because of the innovation in music distribution. However, it was the only business benefactor of the digital revolution as American record labels and artists faced the shrinking profitability of music production.

The popularization of digital singles

When Leonardo Chiariglone of the Motion Picture Experts group first introduced algorithms to compress digital sound files into what is now known as the MP3 file type, it was intended for film and television. It was after a Dutch hacker under the anonymous username of SoloH stole and revised Chiariglone’s original code to convert audio discs in high fidelity MP3 files that the new format for digital music began taking the industry by storm.

To understand the market that iTunes entered in, it is important to get to know its predecessor in digital song distribution. Napster became the first company in 1999 to grasp the change in music consumption and offer a service that followed the changing tides of technology. They operated with a centralized system that allowed users to anonymously share and download music files for free.

Despite the positive reception amongst consumers, record labels and artists themselves were not on board with the appearance of Napster. It was a robbery of intellectual property but difficult to account for, as copyright laws had not been adjusted to consider the distribution of virtual files. In December of 1999 the Recording Industry Association of America, otherwise known as the RIAA, filed a lawsuit against Napster. The media attention drove the company’s popularity to peak at 80 million users, before they were forced into bankruptcy and officially shut down in May of the same year. For a fleeting moment, the record labels had won; however, the idea of anonymous song sharing had been planted and companies like KaZaA, BearShare and LimeWire to name a few, popped up in replacement. They learned from the mistakes of Napster and became even more difficult for the RIAA to trace and shut down. It was an unprecedented turn of events that record labels were not prepared for, but it was also an important learning experience and allowed iTunes to enter the market and deliver a new form of music distribution that was legal, affordable, and appealing for consumers.

iTunes leads the turn of the century

In 2003, iTunes came as a legal solution to providing consumers with digital downloads for a fraction of the price. Steve Jobs was able to grasp the importance of what the digital era offered to consumers: choice, and he ran with it. Paul Vidich, vice president of Warner Music at the time, understood that the attraction of Napster is rooted in how “it gave people a way to connect with pretty much any piece of music”. As the turn of the century came, the major record labels in the music industry were Universal Music Group, Warner Music Group, EMI, Sony and BMG (the latter two who would merge in 2004). To them, the conversion of albums from physical to digital was a hurdle that they were not ready to embrace. After all, CDs made more money. However, record executives knew that they could either follow the transition into the digital age or allow the ownership of copyright property to be completely taken over by anonymous virtual databases.

After Warner joined the movement, Sony, Universal and remaining major music labels followed suit. The catalogue offering of 200,000 tracks upon launch was already a step in the right direction for the music store. The record labels got to maintain their digital rights management and kept control of their property. The only thing they could not change was the price of the songs.

iTunes didn’t restrict the consumer the way previous failed digital sales services did. Every song on the store was priced at ninety-nine cents regardless of the label it was being distributed from; no more, no less. They were the first online retailer that actually allowed the customer to purchase single tracks rather than the full album. It gave the consumer choice and power, although they could also purchase the album in its entirety for ten dollars. It sold one million singles in the first week and has since risen to become the biggest distributor for digital music sales, growing from a revenue of $0.4 billion in its launch year to $2.9 billion four short years after. By 2008, 32 percent of music sales in the US were digital, and iTunes accounted for 70 percent of that.

The largest factor that contributed to the rapid success of iTunes was the innovation in user experience. Party Shuffle was introduced in 2005 to play songs from the user’s library at random and became a popular hit that is still relevant among digital music today. In 2006, the seventh version of iTunes released brought back album cover art, a feature that had been abolished when digital downloads were first introduced. By 2008 Genius was introduced, which used algorithms to create playlists and recommendations for users based on their music library. As iTunes developed throughout the years, they offered new features that enhanced user experience and were never seen before, yet became standards for digital music distribution in the later years. On top of it all, digital singles purchased from their store could be easily integrated into their product line of iPods, making it all the more convenient.

Thanks to its innovative development and opportunistic timing, iTunes faced success. On the other hand, the record companies licensing their virtual product could not hear the same happy tune. Although the affordability of the tracks helped drive its sales, it could not match the original revenue that record labels were able to generate before the digital invasion. Despite the rapid revenue generation of iTunes, it was still nowhere near the massive $38 billion CDs could generate for the global record industry, even during its downfall. But by 2012 the industry had shrunk to almost half its size at $16.5 billion globally. This accounted for all song sales; physical and digital. Annual revenue generated by the record industry in America specifically was on a decline from 2005 onwards. America’s generation of revenue from records fell from a peak of $14.6 billion in 1999 — right before the digital downloads and file-sharing phenomenon, to $6.7 billion in 2014, which was ironically one of the highest performing years for digital downloads. Meanwhile, iTunes continued to grow, along with the rise of Apple, and took home the largest fraction of the pie. Record labels had no choice but to either get on board with the new method of distribution or have their product disappear into obsolescence from the discarded shelves of Radio Shack and HMV.

To combat the file sharing and piracy issues that record labels so feared, iTunes was strict in the protection of their product. Users could use a network known as Rendezvous to shake their music to others; however, the music could not be copied but was simply streamed. iTunes understood the social aspect of sharing music but kept a firm grip on copyright content. When a company called Redigi was formed to allow users to sell their secondhand iTunes files, the company was quick to take it into court. Rather than strictly prohibit sharing; like the attempts of record companies and the RIAA, iTunes still encouraged the sharing of music as a social activity whilst still remaining strict. It was another aspect of innovation in the industry that quick-started concepts that music streaming services would follow in the future years.

Nevertheless, there were still complications with the protection of intellectual property. A study done in 2010 among college students found that even after seven years of iTunes providing a legal form of digital music purchase, there is still a higher level of music file-sharing than there is for purchases. The study estimated that for every song that is pirated, the paid consumption of the track is reduced by anywhere from one-sixth to one-third. No matter how non-restrictive and affordable iTunes can make their music distribution, the prospect of sharing files for free download will always come as a more attractive option.

The introduction of iTunes did not diminish the problem of file sharing and piracy, it simply offered a revenue-generating alternative. Although the sales of Apple’s music store were growing, the music industry as a whole was facing a drastic shrink in revenue. In all, the iTunes era only saw one true winner: iTunes.

The boom of a new era of digital distribution

iTunes still reaps in revenue from their digital song sales; however, there was the emergence of a new form of distribution: streaming. Music streaming platforms that give users the ability to stream an unlimited number of songs for free with advertisements, or pay a premium to enjoy offline and advert-free listening, have taken over the market.

Spotify was first introduced in 2008, and within its ten years of existence has become the new norm for music consumption. Subscriptions services for music are not new, in fact, many failed attempts before iTunes took off were based on subscription models. A notable one is MusicNet in 2001 in collaboration with AOL Time Warner, Bertelsmann, and EMI. Customers would simply pay $9.95 a month, a fraction of the cost of an average CD, and could download up to 100 songs. A subscription service is perhaps attractive to the present day music consumer, but MusicNet’s tracks could only be downloaded onto computers and expired after 30 days. Customers were essentially renting their music, and as a result, the project did not succeed.

What made Spotify, Pandora and even Youtube, new was the concept of streaming. Rather than ownership of music, which is what iTunes offered, these subscription platforms were not selling music, they were selling the service, to listen to music as much as the consumer desires.

Introducing Apple Music

As the popularity of streaming services took off, Apple realized that iTunes could no longer hold the same position it did in the music market a few short years ago. They could not pass an opportunity to join in and introduced their own subscription service called Apple Music in October of 2015. Within three years their subscribers increased from 6.5 million to 56 million, an impressive feat but a still a far cry from Spotify’s 96 million registered premium users — and this number does not count the listeners under the free subscription.

Nevertheless, a great deal of what made Spotify popular; the curated playlists and shuffle library features, were results from the innovative framework that iTunes laid out years ago as they developed their product. Party Shuffle and Genius playlists were originated aspects that were developed from iTunes. The freshness that the online music retailer had offered consumers in their golden era was still reflected through its impact.

These subscription services, along with other streaming services such as Pandora and Deezer, are being given at an average of $10 a month. With the introduction of music streaming, revenue finally began to rise again in 2016 after its continuous decline since the beginning of the digital era. However, revenue and profit differ and it was essentially impossible for the companies distributing content to achieve profitability at these price points. Record labels and especially artists felt the impact of this as well. Musicians, who through iTunes could generate $58,000 in annual download revenue, saw their figures diminish into $6,000 from streaming revenue.

Spotify, the leading music subscription service, was struggling with royalty contracts in 2017, having to pay approximately half of streaming revenue earned to the record labels, they financed themselves through debt.

Conclusion

As the turn of the century came, the music industry was faced with a transition of unprecedented force: the digital revolution. After the fire sharing and piracy phenomenon in 2000, an attractive solution appeared in the form of iTunes, and it is the desperation of record labels to save operations along with the innovation of the music retailer that led to the rapid success of the online music store. Despite its golden era having already come to an end, iTunes proves to be the biggest winner of the transition from physical to digital. Its impact and presence is still felt today despite the decline in digital downloads. As the music industry moves forward, the digital distribution of this virtual commodity will continue to threaten the profitability of record labels and artists. One thing is for sure: although iTunes was not the perfect solution for the digital distribution of music, it was an iconic introduction and force in the music industry that will go down in history.

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