Technology

Apple's 10-Year-Old iTunes Loses Ground to Streaming


Apple's 10-Year-Old iTunes Loses Ground to Streaming

A decade ago, the newly started iTunes Store gave away a song called Over My Head (Cable Car) by an obscure Denver rock group called The Fray. That was, explains lead guitarist Joe King, the band’s big break. “I’ll never forget, our manager e-mailed and said there had been 300,000 downloads,” says King. “Immediately our fan base went from several hundred to thousands, everywhere. Our tour started selling out.” These days, iTunes doesn’t offer that kind of overnight success for undiscovered musicians, despite its 435 million registered users.

Apple (AAPL) opened the iTunes Store on April 28, 2003, as a legitimate, industry-supported alternative to online music piracy, selling most individual songs for 99¢ a pop. It was the first venue to make digital music purchases mainstream. “Consumers don’t want to be treated like criminals, and artists don’t want their valuable work stolen,” Apple co-founder Steve Jobs said in a statement at the time. “The iTunes Music Store offers a groundbreaking solution for both.” Paired with Apple’s ubiquitous iPod music players and, later, iPhones, it quickly became the Internet’s de facto record store, accounting for nearly 69 percent of digital U.S. music sales at its peak in 2010, according to estimates from market researcher NPD Group.

Today, iTunes’ share of the $2.9 billion U.S. digital music market has fallen to 63 percent, NPD says, its lowest since at least 2006. Many users, including those in the music business, complain that the site looks as outdated as the rare neighborhood record shop. “It’s a spreadsheet with music,” says Ben Easton, an artist relations manager for the New York City nightclub Joe’s Pub. The interface, with its signature top-10 lists and dropdowns, has grown stodgier with time and is a major handicap, says Ted Cohen, a recording industry consultant and the former digital chief for record label EMI Music. “There’s no emotion,” Cohen says. “There is nothing on iTunes’ store today that gives anyone the impetus to buy something.”

Ten years in, Apple’s music library has swelled from 200,000 songs to more than 26 million. Yet it no longer has a captive audience. Amazon.com (AMZN)’s cheaper digital music store has seized about 22 percent of U.S. music sales in the last several years. In a bigger threat to the song-purchase business model, Spotify, Rdio, and Rhapsody have signed up millions of subscribers for their music-streaming services, a feature iTunes doesn’t match. While 99¢ a song is cheap for listeners who regularly want new music, it can be much more expensive than the monthly fees at music-streaming services. “It’s no longer about individual tracks, it’s about access,” says Cohen. “The concept of buying music at 99¢ a song is becoming irrelevant.”

Apple diluted its focus on music—and lost its clout when it comes to recommending new artists—as its store expanded to include TV shows, movies, and books, crowding out unknown rockers, Easton says. Unlike with music, iTunes faces competition with movies and TV shows: Amazon and Google (GOOG) offer many of the same videos as iTunes, while Netflix (NFLX) provides unlimited streaming of mostly older programs for $8 a month. That suggests there won’t be one dominant online store in the future, says Mark McGuire, vice president of research at Gartner.

The most recent overhaul of iTunes, in November, added iCloud to allow users to store their music libraries on Apple servers for $25 a year, but that just caught them up with Amazon, Google, and other companies. “In many ways, they’re a victim of their own success,” McGuire says. “Every user is waiting for something extraordinary.”

To be fair, a store with 26 million songs and 435 million customers can only be so adventurous. On April 23, Apple Chief Financial Officer Peter Oppenheimer told reporters on an earnings call that total iTunes media revenue (including music, TV shows, movies, and books) topped $2.4 billion in the quarter ended March 31. “If I was sitting in Cupertino, I wouldn’t be thinking about the Apple fashionistas,” says Crupnick. “You want people who aren’t on the bleeding edge to use it, too.”

Later this year, Apple plans to begin an ad-supported music-streaming service similar to Pandora, according to people with knowledge of the feature who were not authorized to speak on the record. The hope, they say, is that the free radio service will spur iTunes customers to purchase more tracks. Apple spokesman Tom Neumayr declined to comment. A Pandora-style radio service would be a significant step away from the traditional iTunes model of download-to-own, says McGuire, who estimates that the market for downloads will begin to decline, albeit slowly, within five years. “We are in an interesting transition,” McGuire says. “Download-to-own will persist, but with younger consumers, access through streaming services makes more sense.”

By the time Stephanie Berland graduated from college and moved to New York last year, she’d amassed an iTunes library of more than 3,500 songs. She’s barely touched it since last year, when she signed up for Spotify. For $10 a month, Berland listens to a 665-song playlist on her phone, at home, and on the subway. “It’s a week’s worth of music, and I can have it all on my phone. And it doesn’t take up a crazy amount of memory,” she says. “If I bought all that on iTunes, it would cost a lot of money.” She downloaded her last iTunes MP3 file in December, she says. “I bought it for my mom, for her iPod. It’s a really old iPod mini. She has no idea what’s out there.”

The bottom line: iTunes’ share of U.S. digital music sales has fallen from 69 percent to 63 percent as avid music listeners turn to streaming services.

Fixmer is a reporter for Bloomberg News in Los Angeles.

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