Why iTunes Works

The first half of the iTunes Monoploy/Failure Myth debunked the Monopoly Myth by demonstrating how Apple contends in a competitive market for both music players and digital downloads. Here, I'll take apart the other half of the myth by showing that not only is Apple's online strategy a success, but also why and how Apple has maintained its lead while rivals have failed miserably.

iTS Not a Failure

Somewhat ironically, the same bloggers who like to worry about an iTunes monopoly were quick to jump on a report by Jupiter Research with data that found the average iPod user in Europe had only bought 20 tracks from iTunes. Does that mean the iTunes Store is a failure headed nowhere?

Mark Mulligan of Jupiter Research recently clarified that the data in his report was taken out of context to fuel sensationalism. First, the report data is from Europe, which Mulligan points out has "much more of a problem" with piracy than the US. What the report actually underlined was the success of Apple's iTunes Store in selling download tracks, even outside the US, where Apple's music offerings are relatively new.

Mulligan found that while few music player owners were regularly buying music online, iPod users are more likely to buy legal music downloads than users of competing products, particularly the WMA platform. In other words, the emerging market for digital downloads is brand new, and Apple's clearly leading it.

Playing The Numbers

It's easy to divide the sales of 1.5 Billion iTS songs by 60 Million iPods and get 25 average songs sold per player. However, many iPod owners have bought multiple players, and clearly some people are buying lots of iTunes tracks, while many are buying none at all; a simple average does not provide a very clear picture of the market for digital music downloads.

In reality, there is no average user. Rather than crafting a product and service with significant limitations on how it can be used, Apple broadly targets a wide audience of different users with unique needs. The diversity of iPod and iTunes users is actually a core strength for Apple.

Celebrating Diversity

For example, instead of trying to force adoption of a very specific player, Apple offers a range of hardware from the simple Shuffle to an 80 GB model. Each aggressively targets different feature and price points. Users are even tempted to buy more than one player.

On the software side, Apple has targeted very broad interests, adding support for Audible audio books, TV programming, short films, and most recently movies and games. Additionally, Apple targeted athletes with the Nike + sensor and an array of specialty interests in podcast programming.

Few people are interested in everything Apple has built support for in iTunes, but as a package, iTunes represents a very wide market that appeals to a large range of interests and usage patterns. Apple's digital download strategy reflects a number of advantages Apple has in the marketplace.

No Hard Sell

The iPod and iTunes combination serves up downloadable content as a convenience. Users can buy an iPod exclusively to listen to their existing music collection and avoid any mention of the commercial entertainment offered by Apple.

Because Apple makes most of its profits in selling hardware, it can afford to subsidize the costs of presenting a wide variety of content downloads. Yes, Apple does turn a profit in downloads, but it don't have to desperately milk the store for money in order to pay the rent.

That allows Apple to organically grow into new markets, such as podcasting, which also helps to sell iPods. Who else benefits from maintaining a huge catalog of podcasts? For competing music stores, directing users to free podcast content only means fewer potential sales of commercial content!

The lack of a hard sell or an ongoing expectation for subscribed purchases makes Apple's platform more attractive to casual users who don't want to be tied to a service and pay for the privilege of using the equipment they bought.

Microsoft, and in particular Bill Gates, has been for years repeating a mantra of software subscriptions that has simply failed to materialize as a service customers willingly support with their dollars.

Free to be Free

Not only is iTunes itself free, but it offers a catalog of albums, user reviews, album art, Internet radio, and podcast listings for free as well. Consumers can benefit from iTunes' content and services without ever making an online digital purchase. Apple even gives away new content every week, so users can expand their music collection without any commitment to buy anything.

Microsoft's competing PlaysForSure platform expects users to pay a regular fee in order for its ecosystem to work. There is simply not enough profit in content download stores without ongoing subscriptions fees; PlaysForSure stores such as Napster are failing even with regular rent payments from users.

Even Microsoft is abandoning its PlaysForSure program in its solo effort to compete against the iPod, although it still seems to think that exploding media will somehow save the Zune when it already failed under a different name: the Toshiba Gigabeat.

Microsoft seems to think that changing the name of failed products and initiatives automatically gives them new lease on life. That's because Microsoft is primarily a marketing company, not a technology company. It apparently learned little during the dot com days.

Hype only fools investors for a limited period of time. At some point, all companies have to create value in order to make money.

How To Make Money on The Web

Has Microsoft forgotten about the failure of services such as AOL, eWorld, and MSN, which all hoped to create subscription services to online content? They all eventually failed; there was simply too much free content available, and each presented too little real value to compete for customer's hard earned dollars.

The only real profits to be made on the web are related to offering products people want to buy. Successful Internet companies such as Amazon, Ebay and Google all link potential buyers to real sales. Each has created an audience of consumers by offering services the public finds useful next to things they can directly buy.

By similarly offering free services and making desirable content available for sale on the side, Apple is able sell to people interested in the convenience of digital downloads without demanding the regular rent payments that turn off casual buyers.

Look Mom, No Ads

Not needing to turn a profit or subsidize a failed business plan also means that Apple can present the iTunes Store free of ads, and sell ad-free content. Steve Jobs presented the lack of ads in the store and in programming as a key differentiating feature.

As Jason O'Grady observed in a recent review of Apple's NFL GameDay programming, the iTS offers 90 minutes of TV football in 70 minutes because there are no ads. One of the reasons Tivo is so popular is because it allows users to skip past ads. Apple's iTS does the same thing without angering advertisers, because they simply don't exist in Apple's business plan.

Apple is pioneering ad free, paid content on the web while others are trying to subsidize the expense of hosting free content by using ads. MySpace and YouTube have proven that free content has a large consuming audience, but they also prove that ads don't support that model.

Again, this was something the tech world should have learned back in 2000 when advertising similarly failed to subsidize a range of bad business models. Dot coms seemed to think profitless business ventures that made no fiscal sense would somehow survive by incorporating advertising. They didn't.

Ad Free TV

There was once a time when we watched movies on broadcast TV, with frequent breaks for ads. HBO found success in offering a paid movie channel with no ads. Users enthusiastically bought it and a surge of similar paid cable programming appeared.

Similarly, the model of ad supported television is also at risk. It's difficult to pair programming with audiences in broadcast television, but it's also difficult to create original short-format content for broad audiences in the paid broadcast model of HBO.

At the same time, there is a clear market for paid, short-format TV. Consider how Fox canceled Family Guy only to bring it back again after finding impressive direct sales on DVD. How many times have fans contributed donations for canceled TV programming?

The Curiously Long Tail

Paid content allows users to vote for programming directly with their dollars, rather than though a complex 'electoral college' of ad forecasting, demographics, and competition for limited time slots in a broadcasting schedule.

Direct sales of content don’t have to account for lost opportunity costs! Broadcasters only have a limited amount of airtime to fill, but Apple can offer as much content as possible and still profit from small markets than can’t support a broadcast time slot. This opens the iTS as a medium for content outside of the mainstream.

Customers want the opportunity to pay for content they enjoy. Few companies are targeting this demand. Apple is positioned well to offer a diverse market for paid TV content from iTunes, and its performance over the last year indicates the iTunes model is working well.

Secrets to Success

While rivals love to find ways to suggest that iPod sales are in decline, or that nascent killers are surely just around the corner and ready to really do some damage this time, its pretty clear that Apple is staying on top of the market.

Coming up, I'll take a look at some of the more technical reasons why Apple has maintained its lead in digital content, as well as potential markets Apple can target in the near future.

As a special aside, I’d like to thank everyone who has contributed toward my site by subscribing or donating via PayPal, or clicking through my Amazon and iTunes links when buying from those sites. I really appreciate your support!

I also really like to hear from readers. What do you think? Leave a comment or email me with your ideas.

Next Article: Why Microsoft Can’t Compete With iTunes

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Tech: Online Music & Media