The personal blog of M. Scott Smith

Napster, Yahoo say iTunes is doomed 🔗

According to a USA Today article, executives from Napster and Yahoo say that iTunes is doomed, due to its flat per-song pricing model. Napster and Yahoo primarily push a subscription-based model.

Unfortunately for them, consumer sentiment does not seem to be on their side. As of late 2004, iTunes had sold over 200 million songs (using the 99-cent per song pricing model). How many subscriptions have companies like Napster sold? They won't give exact numbers, but have conceded that it's very low. (That these subscription models are incompatible with the iPod -- which demands 90+% market share for hard disk-based music players -- might play a role.)

So why do these companies prefer the subscription-based model?

"Selling 99-cent singles isn't working as a business model for us or for consumers," explains Dave Goldberg in the article. Goldberg runs Yahoo's music division, which includes Musicmatch. "We sell hundreds of downloads, but we don't make money on them. Subscriptions is a much better business for us."

There you go. Companies such as Napster and Yahoo's music division make more money when they sell recurring music subscriptions, not individual songs.

So far, though, consumers don't seem to care.

Napster CEO Chris Gorog is quoted as saying that it would cost $10,000 to fill a high-capacity iPod with 10,000 songs. (Well, not necessarily; if you buy $9.99 albums through iTunes, they often include more than 10 songs. And you can rip your own CD's, purchased anywhere, to place on your iPod. With Apple's GarageBand, you can make your own songs and add them to your iPod. Or you can place audio books on your iPod. Etc.)

"With our plan, customers can get 10,000 songs on their device for $180 a year. It's an enormous value," Gorog says.

But not so enormous of a value at the end of the year, when the 10,000 songs suddenly disappear in a cloud of smoke. (Well, not literally. But I'm not sure. Like most music listeners, I've never purchased a subscription-based model, so I really can't say for sure whether there's a cloud of smoke or not.)

The subscription model has worked fine for videos, although more and more consumers are now purchasing movies outright on DVD, since the average cost of a DVD has fallen below $20.

But there is a difference between movies and music. As Apple CEO Steve Jobs said in an interview last year, you can buy a song and listen to it and enjoy it thousands of times throughout your lifetime. But you might watch a favorite movie only a few times. (And if you're one to watch Star Wars a dozen times, you're probably going to purchase the Star Wars Trilogy on DVD vs. continually renting it from Blockbuster.)

Customers like owning their music. They don't like renting it. That seems to be a fact of life. In fact, it seems to apply to most everything: most folks would rather own their own house than rent one; would rather own their own car than lease one; etc. People also like to "collect" things. I've noticed most people take pride in their music collection; it's a reflection of their individual style, and provides a historical perspective to their life. I can trace through my evolving musical tastes by flipping through CD's purchased throughout different points in my life.

Apple "got" all of this when they launched iTunes, and iTunes has met with remarkable success, obliterating its (subscription-based or otherwise) competition.

A subscription-based model is always more lucrative for the company selling it (which is why Microsoft and other software companies are so eager to push subscription-based, recurring software licenses), but that's not always what the customer wants. There were on-line music stores before the advent of iTunes, but iTunes was the first to put the customer's needs first, and customers have responded. It was pretty clear Apple had hit the right formula when iTunes song sales -- originally limited to the meager Macintosh market -- significantly and instantaneously eclipsed rivals that ran on the much-larger Windows market.

So there you go. You will continue to hear companies and analysts talk about subscription models for music, as the "logical" place for on-line music stores to go, but the companies pushing subscription models are not doing it for the customer -- they're pushing the subscription models because they make more money that way (or in some cases, that's the only way they can make any money).

This is not to say that there isn't a place for music subscription models. Given a choice, I would rather own my music outright. I don't want to keep paying for the same song over and over again for the rest of my life. But there are also some songs that I might only enjoy for a brief period of time. (Like, say, Macarena. I'm sad to say, I did enjoy that song for about one day.) For those types of songs, a subscription model might work -- but not in place of an ownership model, just as a supplement to it. (And, frankly, I view over-the-air and satellite radio as filling that "subscription" need.)

Apple has the technology to (swiftly) offer a subscription model if they feel that's what their customers want, but so far there are 200 million data points pointing to a different verdict. So for the time being, while Apple's competitors and analysts might "demand" that Apple move to a subscription model or be doomed, the facts say that Apple has picked the right business model. And if the dynamics do eventually change, you can bet Apple will be quick to respond.

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