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More evidence that iTunes has peaked

December 11, 2006

Last week, I noted a Wall Street Journal article describing how online sales of digital music appear to be flattening this year. Because those sales are dominated by Apple's iTunes store, the numbers suggested that music companies would be under increasing pressure to seek strong new outlets for online sales, which would in turn likely require the sale of songs in unprotected MP3 format - in other words, without copy protection.

A new survey by Forrester Research provides further evidence that iTunes sales may have peaked. Forrester analyzed nearly 3,000 iTunes transactions made by a group of about 7,000 consumers between April 2004 and June 2006. It found that iTunes purchases grew rapidly between April 2004 and January 2006, from 2 transactions to 17 transactions per 1,000 households. This year, however, the trend reversed, and sales actually began to slow. According to Forrester, "the number of monthly transactions declined 58%, while transaction size fell 17%, leading to a 65% overall drop in monthly iTunes revenue."

Because the decrease has been sharp and has continued into June, it seems to be more than merely a seasonal fluctuation. In June 2005, according to the Forrester data, there were 10.3 iTunes transactions per 1,000 households, while in June 2006 there were just 7.0. The average transaction size in June 2005 was $7.85, while the average in June 2006 was $5.54. In combination, those two drops led to a fall in iTunes sales per 1,000 customers from $80.92 in June 2005 to $39.01 in June 2006. What's particularly interesting, or, if you're a music company, particularly troubling, is the fact that iTunes began selling videos in the fall of 2005. That means that the drop in sales for music has been even greater than the aggregate numbers indicate.

The Forrester study provides other clues that, while iTunes may help promote iPod sales, it's been no panacea for music companies or musicians. Rather than being a central source of new music for consumers, iTunes's business is dominated by occasional impulse purchases. The average household that buys from iTunes makes fewer than 6 transactions over the course of a year, and the median size of the purchases is just $2.97. One-third of all iTunes purchases are for $1.08 or less, and three-quarters are for less than $10.00. About 10% of all iTunes buyers bought a grand total of one song over the past year. Sales of music through iTunes continue to be dwarfed by sales of music on CDs, notes Forrester.

Moreover, Forrester found (as the New York Times reports today) that the ratio of iTunes songs sold to iPods sold has remained steady at around 20-to-1 since the iTunes store opened. That indicates that iPod owners reduce their iTunes purchases over time. As Forrester notes, "If iPod owners continued to purchase music tracks throughout the lifetime of their ownership, one would expect to see iTunes sales growing at a faster rate than iPods." (Note that you'd need data on the number of iPods that are sold to people who already own an iPod, rather than to first-time buyers, to confirm this hypothesis. If you have two iPods and you buy 40 songs, you've bought 40 songs, not 20 per iPod.)

The upshot of the study is clear. Online sales of digital music continue to be relatively modest, and if music companies want to increase them they'll probably need to look beyond Apple's iTunes store, which may well be tapped out as a source of growth. I'd be surprised if we don't see record companies make a concerted effort to open more online retailing channels in 2007, probably selling songs in unprotected MP3 format.

Finally, one should take reports of the imminent demise of the music CD with a grain or two of salt. The music market continues to be dominated by the sale of CDs and the unauthorized trading of songs ripped from those CDs.

UPDATE: A Piper Jaffray report paints a very different picture of iTunes sales so far this year. The report found "that the number of songs sold per week on iTunes had risen 78 percent in the first nine months of 2006 compared with the same period in 2005," according to Reuters.

Comments

>>More evidence that iTunes has peaked

>>The music market continues to be dominated by the sale of CDs and the unauthorized trading of songs ripped from those CDs.


A bit contradicting?

Remember, the margin is in the player not the digital download.

Posted by: jamesgross [TypeKey Profile Page] at December 11, 2006 11:28 AM

As I recall, Steve Jobs thought that the DRM restrictions were pointless but accepted them as a condition for iTunes.

If the music industry will publish DRM less music, the sale of iPods is going to go through the roof.

Posted by: michael webster [TypeKey Profile Page] at December 11, 2006 03:11 PM

Sorry, but how do 7,000 consumers engage in only 3,000 transactions? Does the sample include consumers who never completed a transaction?

Posted by: Ron [TypeKey Profile Page] at December 11, 2006 11:35 PM

Ron, The sample is a cross-section of people who shop online. Only a portion of them shop at iTunes. Nick

Posted by: Nick Carr [TypeKey Profile Page] at December 12, 2006 08:11 AM

Nick,
All sorts of noise about this today.
You may have seen this:
http://blogs.forrester.com/devicesmedia/2006/12/itunes_sales_ar.html

Is the problem with Forrester, Apple or the journos who reported on it?

This one could run a while...


Posted by: Thomas Otter [TypeKey Profile Page] at December 14, 2006 11:36 AM

Thomas,

I have to say that I'm really not sure how to interpret the Forrester statement you linked to. Is it standing by its study or not?

Nick

Posted by: Nick Carr [TypeKey Profile Page] at December 14, 2006 10:36 PM

Nick,
I may have missed it, but Forrester's management haven't exactly made their position clear.

Personally I think it is poor form that the Analyst has to blog his own defence. The report would have been checked by colleagues and an editor or two before publishing, so if the report is inaccurate or misleading then the blame lies collectively.

Forrester should have published the report in its entirety when the trouble broke, as it would have enabled us all to figure out what the report really said.


Posted by: Thomas Otter [TypeKey Profile Page] at December 16, 2006 11:47 AM

I think that there is one thing missing: Will the RIAA learn and do what it should have done 6 years ago?

RIAA Execs have to have discussions with Executives from Symantec / McAfee et al - companies that have made billions over the last decade "giving away" software. Call it nag-ware, shareware - what ever term you like.

I said it years ago - the RIAA should have invented a tool that allowed the downloading of digitized audio files (a la Napster). However, when playing that audio file, 5 or 10 second spots at the beginning, middle and end of the track have audio overlays requesting registration. Registration within the tool then removes that overlay. In a peer to peer event, when someone "shares" that audio file - the overlay is back.

The one thing that iTunes demonstrated is that when legal alternatives exist, there will be a moral majority that will legitimately purchase rather than illegally pirate.

Regards.

Posted by: ERoss [TypeKey Profile Page] at December 20, 2006 04:55 PM

When Ver 6 of the iTunnes software was released last year, my wife and I stopped buying music from iTunes because it was then no longer possible to convert (via Hymn) the m4p format to mp3. Since neither my wife or I use our ipods as our primary source of music, this restriction negates most of the value of any music purchased from itunes. Both our cars have the ability to play mp3 files off a CD. A single custom mp3 CD can hold such a large volume of music, it completely eliminates the need to keep a small library of standard music CD in our cars. This also applies to custom CDs I make for use in my office.

It is very simple. We are not going to purchase music if we are restricted how we can play this music. In this regard, our wallets have made a statement (albeit a very small one) to Apple. I wonder if the slump in sales discussed in the articles above has been influenced by others with the same issues. Is there a connection with the release of iTunes ver 6 and sales volume?

Posted by: RhoXS [TypeKey Profile Page] at January 5, 2007 09:14 PM

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