Apple's iTunes and the digital content market revolution

iTunes

The downloadable, digital content market barely existed a decade ago, but it has since grown remarkably into a billion-dollar business, with millions of people each day going online to download audio and video files. In that market, Apple Inc.'s iTunes product has become a clear leader and pioneer. Apple launched iTunes, which organizes, plays and sells digital audio and video files, in 2001, when peer-to-peer file-sharing sites such as Napster were being sued into bankruptcy over copyright and piracy issues. iTunes was able to partner with content providers to offer copyright-protected digital files that became a significant source of revenue for Apple and the company's suppliers.

By the end of 2006, iTunes was receiving more than 20 million unique visits a month, and was experiencing growth of more than 50% in revenue, transactions and users (Angell). While iTunes has been an unqualified success, the product has dealt with its share of controversy and challenges. Over the past several years, Apple has been slapped with class-action lawsuits over its decision to exclusively bundle iTunes with its popular iPod portable music players. iTunes will only function with iPod portable music and video players, and those iPods can not be used in conjunction with other online music and content providers, such as the paid version of Napster. Critics claim this bundling stifles competition and has been inadequately disclosed by Apple. Further, iTunes is facing greater competition in the online music market, which will require it to become a more holistic supplier of a variety of content types. In short, iTunes has been an incredibly successful and popular digital content product that will need to make changes to how it operates and what content it offers to retain its market strength over the next several years.

How iTunes has succeeded

Through iTunes, Apple's greatest legacy in the digital content market may be that it saw revenue opportunity where many other companies did not. Peer-sharing sites, such as Napster, which launched in 1999, had been offering music and other digital files for free to subscribers, and it seemed that consumers had become accustomed to not paying to download content ("Napster must stay shut down"). In the midst of this hostile market, where digital music had been completely devalued, Apple began developing the iTunes product to sell music files for a fee.

What did Apple understand that other competitors did not? Apple guessed correctly that the good times that free sites, such as Napster, Kazaa and BearShare, were enjoying were not going to last. These sites were offering copyrighted material for free and without permission, and their business practices touched off a wave of litigation. The Recording Industry Association of America began suing individual users of these services - a practice that the group is pursuing to this day - which scared many users away from the free sites. Similarly, the RIAA, with the backing of many musical artists who were irked that their product was being given away for free, prevailed in a landmark lawsuit against Napster that forced it to shut down its service in 2001, sell its assets, and relaunch as a paid service ("Napster must stay shut down").

In the same year that Napster was being forced to temporarily cease operations, Apple launched iTunes as a paid music service. The timing was perfect. iTunes offered users the convenience of downloading music files for as little as 99 cents, without the potential copyright issues that came with using free services, such as Napster. Eventually, iTunes began offering video content, such as music videos and television shows, as well. By working collaboratively with content producers, such as record labels and, eventually, film studios and distributors, Apple created a digital media service that avoided copyright issues, produced significant revenue, and allowed the content producers to share in the success.

Apple, through iTunes, essentially created the market for paid digital music files, and that market has soared. In 2005, just four years after the launch of iTunes, the global market for downloadable, digital music exceeded $1 billion, and it continues to grow (McCullagh and Broach). iTunes remains the leader in this revenue market, which it had a significant hand in creating.

The other critical piece of Apple's strategy when launching iTunes was to make it the exclusive program for downloading music and videos onto the company's popular iPod portable music devices. Apple also launched the iPod in 2001, and designed it so it could only be used with iTunes, and no other online music sites. Similarly, music and video files that are downloaded from iTunes can only be played on iPods, and no other portable media players. So, as millions of Americans rushed to purchase iPods over the past several years, they have essentially been making a commitment to iTunes as well. In short, Apple's operating strategy with iTunes has focused on aggressively offering a good variety of content, while bundling the iTunes product with the popular iPod music and video player.

A iTunes positions for increased competition

The digital media market should remain strong and growing for the foreseeable future, even as competition increases. While iTunes may have helped create the downloadable media market as a revenue stream, it now faces some formidable competitors. Napster is operating as a paid service, and major players such as Yahoo! And Real Networks also are offering downloadable music for sale. Some sites, such as Napster, are offering unlimited downloads for a monthly fee, in contrast to iTunes' pay-per-track model. There are also dozens of other smaller sites that compete with iTunes, as well as some free services that continue to operate, despite the risks those services pose to consumers.

But as the competition has grown in the digital music market, iTunes has continued to compete well by offering more types of content. Users can download music videos, television shows other visual media, as well as "podcasts," which include various types of audio content. As competition has increased, iTunes has simply improved its content offerings to levels that competitors can not match. iTunes major competitors, such as Napster and Rhapsody (which is owned by Real Networks), currently offer no video services. Yahoo! offers music videos, but no other video content. In short, iTunes is in a strong competitive position because it has pursued the online video market much more aggressively than its competitors in the music space.

Plus, the fact that millions of iPods have been sold worldwide, and those players can only download music from iTunes, has helped iTunes remain strong despite an influx of competition.

Conclusion: Changes are coming

Ultimately, we can predict two future directions for iTunes with relative certainty. First, we will see iTunes continue to aggressively grow its offerings in the digital video arena. Second, we can expect a technological divorce between iTunes and iPod, so they are not completely dependent on each other to function. A variety of market and regulatory forces will work together to move iTunes toward both of these critical developments.

A iTunes expansion in the digital video space seems to be a no-brainer from a business perspective. The digital music market developed first, aided by peer-sharing sites such as Napster and Kazaa, and it is understandable that much of Apple's current focus through the iTunes store has been on selling digital music tracks and albums. However, the digital video market is growing significantly, and we can expect iTunes to provide even more robust video offerings in the future. According to the iTunes Web site, users already can download thousands of music videos and more than 350 television shows. In a sign that Apple is serious about growing its video services, the company recently launched a movie service that allows users to download feature films for $9.99 a movie. iTunes video services will only grow more as Apple faces growing competition from online music and video providers. As was discussed, Apple has faced significant competition in the online music space, and competition should grow in the online video market as well. Wal-Mart even entered the digital video market in 2007, partnering with Hewlett-Packard to offer an inline video service to compete with iTunes (Gohring and Ames). In short, iTunes has spent its early years being viewed as a digital music store and jukebox, but it is clearly evolving into a provider of multimedia content. Competition will force iTunes to continue in that direction.

We can also expect the iTunes technology to become more accessible to people who may not own iPod portable music and video players. Apple's decision to exclusively bundle the iTunes program with the iPod music and video players has caused a great deal of frustration among the public, and has led to the previously discussed lawsuits in the United States and in European countries. Signs indicate that more lawsuits can be expected. Quite simply, there is too much pressure being applied to Apple for it to continue conducting business as usual. Further, it is bound to eventually lose a lawsuit in one of the countries in which it is facing (or will face) litigation. Europe is notoriously aggressive when it comes to antitrust issues.

Whether Apple loses in court or simply sees the handwriting on the wall and decides to change its business practices, we can expect a decoupling of iTunes and the iPod to occur. The end result could be positive for iTunes - people who own portable music players other than iPods will now be able to use iTunes, although Apple will have to work hard to keep current iPod owners from migrating to other content providers. Perhaps the de-coupling will even be positive for iPod sales. The fact that iPods will be compatible with music services such as Napster could increase their appeal to some consumers who were not enamored with iTunes.,

In conclusion, iTunes has been a hugely successful product for Apple, as it has integrated well with other Apple products and has helped revolutionize the digital media market. While Apple was an early and aggressive entrant into this market, it has become crowded and there are numerous market and regulatory forces that are presenting challenges for the iTunes product. We can expect Apple to respond to these challenges by evolving iTunes into a supplier of diverse multimedia content that can be accessed by people using a wide variety of communications devices. The bread-and-butter philosophy behind iTunes, which has focused on music and a lack of cooperation with other suppliers, has carried iTunes through its first six years, but it will not carry iTunes through the next six.