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Additional reporting by Greg Sandoval
Ten years ago this month, a music sector ravaged by Napster and largely ignorant of digital distribution found a savior of sorts in what was then called the iTunes Music Store. With its 99-cent unbundled songs, the service quickly became the only significant source for acquiring music legally online.
With iTunes, Apple had drawn the blueprint for distributing music, movies, books, and apps over the web. By supplying and tying together a music player, online store, and song-mangement software, Apple drastically simplified the entire music experience, defying the odds to build a music-retailing dynasty even as file sharing skyrocketed. A decade ago, Apple started to answer what would become an all-important question: how do you get consumers to pay for content again?
"They invented the digital music business," said Michael Nash, the former digital chief at Warner Music Group. "Apple really created the convergence of music and technology and showed everyone what the connected economy around content looks like."
Now known simply as the iTunes Store, the music, movie, TV, book, and app marketplace celebrates its 10-year anniversary on April 28th. Few should be singing Happy Birthday with more zeal than those at the major entertainment companies. And now, as the iTunes Store enters its second decade, there’s a growing sentiment that iTunes has become bloated and stagnant, that Apple is resting on its laurels and failing to innovate while a new generation of music services begin to find an audience. Over the next ten years, will the company be able to evolve its longstanding business model and keep dominating in the face of upstart competitors?
A new model
In the early 2000s, web piracy began to mushroom and digital music services launched by the large record labels — MusicNet and Pressplay — were busts. There was a "scramble in the music industry to create a service to answer the marketplace," according to Paul Vidich, the former executive vice president of Warner Music Group and the first label exec to cut a licensing deal with iTunes.
In April of 2003, the iPod was already drawing intense consumer interest — Apple claimed the device was the number one MP3 player in the world with over 700,000 sold. (For context, Apple sold 5.6 million iPods in the last quarter, despite the continued downturn in the MP3 player market.) Getting content for that iPod, however, was a bit of a mess — it seemed nobody knew how to build an easy-to-use web music service. Napster may have shut down in late 2001, but P2P music sharing was already out of the bag — and the options for legally acquiring music online were poor.
However, Apple aimed to change all that with the iTunes Music Store, the first real a la carte download music service, built directly into the software. At launch, it was Mac-only and offered a relatively tiny catalog: 200,000 songs (it currently has 26 million). But it did have the support of the major record labels of the day: Universal, EMI, Warner, Sony, and BMG. The partnerships were key to helping Apple take control of music distribution — without the songs, the iPod was a nicely designed but empty box.
Steve Jobs' salesmanship helped close those deals. Vidich remembers the Apple CEO flying to New York to demonstrate iTunes for Warner execs sometime around September 2002. CEOs didn't often handle product demos but Jobs "was so exuberant about iTunes and its simplicity," Vidich said. "We were too. The other products out there just weren't simple to use."
Jobs certainly had his challenges. Vidich said he's the one who suggested that iTunes charge 99 cents per track and he remembers Jobs nearly hugged him. At the time, Sony Music execs wanted to charge more than $3 a track, according to Vidich. No doubt a $3 song price would have tied an anchor around iTunes' neck, stifling growth. 99 cents, on the other hand, was below the sub-$1 psychological barrier — and has continued to be an important price point for not only music but the wide swath of 99-cent iOS apps in the store.
Eventually all the major record companies signed one-year deals, and at the conclusion of the store’s first year, the labels found themselves captives. iTunes sales had grown so fast and the buzz was so electric that Jobs held all the leverage in subsequent negotiations. Apple sold one million songs in the first week and 10 million by September of 2003. In its first year, the company sold 50 million. "If you were in that space and you weren't supplying iTunes," Vidich said, "you weren't cool."
Apple’s most important move to make itself cool was to create of one of the most memorable ad campaigns of the last decade: the famous dancing silhouette ads.
In contrast to Apple’s typical spots focusing on simplicity and design elements, its iPod / iTunes ads featured loud music, quick movements — and no clear shot of the product itself. The ads sold you music and white earbuds, with the rest left to your imagination. When the iPod was first released, those white headphones were an exotic rarity that pointed to someone carrying a piece of bleeding edge technology — but after Apple’s silhouette commercials, they soon became a constant reminder of Apple’s dominance in the music world.
All the major record companies signed one-year deals, and found themselves captive to iTunes explosive growth
"They were the undisputed leader with no one touching them," said Jason Hirschhorn, a former exec at MTV, MySpace, and Sling Media. "They were the hottest thing in pop culture. They were the devices that all the media execs carried." Media execs were hardly the only ones. The iPod was already the top-selling MP3 player on the market, but the iTunes Store launch helped increase the size of that market exponentially — and Apple never came close to losing its dominant position.
At the core of Apple's success was the airtight combination of iTunes software, the iTunes Store, and the true ace up its sleeve: the iPod. The power of this combo can’t be overstated — everyone wanted an iPod, and they already used the iTunes software to manage the iPod’s content. The DRM included in all iTunes files (until May of 2007, when Apple began the process of going DRM-free) meant that its files couldn’t be used on other MP3 players, and most other stores’ music wasn’t compatible with the iPod. Competitors were locked out.
Apple bet that the majority of consumers wouldn’t have an issue with its lock-in tactics, and it bet correctly. They got to use the hardware they wanted and had a best-in-class online music store to fill it up. Of course, the iPod continued to support standard, DRM-free MP3 files, so critics couldn’t say that Apple was forcing users to buy music from the iTunes Store. Still, the airtight hardware and software model made it easy for consumers to increasingly spend more of their music budget with Apple.
One million songs were downloaded in the store’s first week, 25 million by the end of 2003, and one billion by February of 2006. iPod sales responded in kind, jumping from under one million in 2003 to over four million in 2004 to a staggering 22.5 million in 2005. By the time iPod sales reached their peak at nearly 55 million in 2008, the iTunes Store had supplanted Best Buy as the number one music retailer in the US. Less than two years later, in February of 2010, iTunes became the number one music retailer on the planet.
The legacy
As the iTunes Store became the model for selling digital music, Apple’s competition scrambled to find a way to keep up with the company’s runaway success. Since most competitors didn’t have the same three-pronged store / software / hardware system, most took a different tactic — they focused on Apple’s lock-in.
Microsoft spearheaded the movement with “PlaysForSure,” a partnership between compatible hardware manufacturers and music stores (most of which focused on subscription services). It launched in October 2004 and was an abject failure almost from the get-go. Most PlaysForSure-compatible music stores closed after a few years, and hardware partners like Archos, SanDisk, iRiver, and Creative eventually found themselves niche players.
"To say that Microsoft can just decide to copy (iTunes) and copy it in six months — that's a big statement. It may not be so easy."
As for most of the storefronts of the day, such as Aol MusicNow, MSN Music, Yahoo Music Unlimited, Sony Connect, MTV Urge, SpiralFrog, or Ruckus, few survived longer than a year or two. Microsoft itself abandoned PlaysForSure after less than three years and changed strategies with the launch of the Zune — an MP3 player that came with an iTunes-esque store-and-software combination. It never quite found a market, either, though a lot of what Microsoft learned from the experienced has gone into Windows Phone and Xbox Music.
That some of his competitors would stumble trying to duplicate iTunes success didn't surprise Steve Jobs. He told Rolling Stone not long after iTunes launched: "To say that Microsoft can just decide to copy (iTunes) and copy it in six months — that's a big statement. It may not be so easy."
As iTunes’ success grew, so did its content offerings — one of the biggest facets of Apple’s dominance in the digital landscape was how it took its findings from selling music and applied them to TV shows, movies, and eventually apps. The company built both a distribution model and a usage model (the now-loathed iTunes syncing process) and used it to keep adding more and more media to the three prongs of its ecosystem.
The App Store
While the iTunes Store was a near-instant hit in the music space, it didn’t spark the same revolution in video. Originally, use cases for TV shows and movies from iTunes were rather limited — you could watch on your iPod’s tiny screen or on your computer, but Apple didn’t have a straightforward way into taking over the living room. The launch of Apple TV in 2007 helped, but it was famously a “hobby” product for the company for years. Recent revisions and improvements to the store and Apple TV have made it a strong contender for the living room, but it was a while before video was considered one of Apple’s strengths.
If music was a hit and video was more of a slow burn, the launch of the App Store in 2008 is probably best described as a rocket igniting. The June 2007 launch of the iPhone was even more disruptive than the iPod, and consumers quickly clamored for the ability to extend the expensive device’s features beyond the 16 apps Apple included when it launched. It didn’t take long for Apple to get the message. Despite Steve Jobs’ insistence that web apps in Safari would be the ideal mobile solution for developers and consumers alike, Apple announced the forthcoming availability of a full iPhone OS SDK in October of 2007. Over the App Store’s first weekend in July 2008, consumers downloaded a staggering 10 million apps — the familiarity with Apple’s digital marketplace, the abundance of high-quality free selections, and the pent-up demand amongst iPhone owners meant the App Store was an immediate success.
Having a vibrant, third-party app ecosystem became the defining feature for a smartphone
“The App Store changed everything,” said Jeremy Olson of Tappity. “It made selling software so easy that anyone could do it, and it made buying software so simple and affordable that everyone does it.” Part of the App Store’s power was that it leveled the playing field between giant companies and independent developers. “My dinky three-person team has built apps that at certain points in time were some of the highest selling apps on the whole store, dominating all the huge competing brands,” said Olson.
For some developers, the App Store provided a significant financial windfall. “Without much to lose, I founded App Cubby on a $20k loan from family members,” says David Barnard, who was “completely broke” when the App Store launched. “Over the next five years App Cubby grossed well over $1 million.”
Almost overnight, having a vibrant, third-party app ecosystem became perhaps the defining feature for a smartphone — and the lack of one would quickly lead to hard times, as seen in the struggles endured by Palm’s webOS and eventually even the powerful BlackBerry brand. Google, Apple’s main competitor in the mobile device space, certainly took the lesson to heart. Its Google Play market for the Android OS covers nearly all the same bases as iTunes, with vast selections of music, movies, TV shows, books, magazines, and apps.
Side effects
Despite its success, Apple's iTunes has received its share of criticism. Those signature white earbuds delivered poor-quality sound (though they were better than many pack-in headsets of the time). More concerning to artists was the concept of selling compressed files — the quality they had painstakingly crafted was lost in Apple’s 128kbps AAC compression. As for the overall health of the music sector, two years before iTunes launched the labels generated $14 billion in revenue. Sales last year were half of that. Some critics feel that Apple helped strip the value out of music.
Indeed, iTunes hacked away at the dominance of the album as a sales unit and simultaneously tapped into consumer desire to be more selective about the music they owned. Apple’s business model brought back the single, which up until the early 1990s was one of the primary formats for the recording industry. The single all but vanished with the rise of the CD, and music fans were forced to pay for entire albums to get the songs they wanted. Apple unbundled songs, sold them for less than a buck — and paved the way for the CD’s eventual extinction.
The ability to buy nearly any single song without needing to buy the whole album really pushed the concept of the “digital mixtape” into high gear. Music listeners could now easily experience what Apple promised back in 2001 with its “Rip, Mix, Burn” commercial, and playlist curation and sharing has only grown in popularity since then. If you’ve ever spent any time using Spotify, you’ve likely come across all types of user-created playlists in a wide variety of themes — the iTunes Store helped popularize that concept. Plenty of artists didn't like it — AC/DC, Jon Bon Jovi, and Kid Rock were among those that criticized Apple's practices or withheld their songs from the service.
Of course, iTunes wouldn’t still be here if the Store and the iPod hadn’t been easy and fun to use, but Apple nailed both the hardware and the user experience out of the gate. It’s easy to forget a decade later as both the iTunes software and Store have become bloated, but once upon a time iTunes was a far superior option to most other music-management players. There’s no doubt that the iPod’s excellent UI, small size, and solid battery life were a major step forward from the clunky “Jukebox” players of the day that offered high storage capacity but little else.
As someone who grew up dealing with a number of pre-iPod MP3 players, I found the simple experience of buying new music on iTunes and plugging in the iPod to automatically sync new content to be a vastly improved user experience. Even now, just holding the iPod hardware, with its signature shiny, scratch-prone back and then-ubiquitous click wheel, brings back memories of a time when digital music made the huge leap beyond laptop speakers and burnt CDs. And being able to wake up, download a brand-new album you’ve been waiting for, and immediately take it out the door with you made iTunes’ tradeoffs well worth it.
The next decade
Looking forward, Apple remains in a healthy position with content creators and publishers, despite the occasional tensions. While the top film studios and major labels have sought to nurture Apple's competitors to help loosen Apple's control of retail sales, the links between the company and its suppliers are strong, says former Warner Music Group exec Michael Nash. He cites Apple's decision to wait to launch iTunes Match, its $25-per-year cloud music locker, until it had obtained all the necessary licenses — even while Amazon and Google launched unlicensed cloud services free of charge.
"Amazon and Google didn't believe in the value proposition around paid lockers," Nash says. "Apple was willing to wait to get the deal done and go into the market with a paid locker service. That represented their commitment to the content owners. They were more interested in getting it right and believed that consumers wanted the features of a licensed service. Apple is a good partner and has shown it values content."
"We think subscriptions are the wrong path. We think people want to own their music."
While Apple may still be the dominant player in the digital music arena, cracks are starting to show in the company’s strategy. When introducing the iTunes Store 10 years, ago Steve Jobs said that ''these [subscription] services treat you like a criminal. We think subscriptions are the wrong path. We think people want to own their music.” While download sales are growing modestly, subscription music is finally making a dent and seeing white-hot growth — companies like Spotify and Rdio are doing subscriptions right after the mistakes of their predecessors. These services, which the labels call "access models," have grown in a very short time to make up 15 percent of the industry's total revenue (pdf).
Apple may now let users load songs from the cloud and access them via the internet, but the iTunes business model has remained largely unchanged. It may be a proven strategy, but Apple appears to have no interest in finding a way to communicate with those who don’t care about "owning" music. While many consumers are still happy to buy music from iTunes, there’s a growing population moving to more innovative services that are finally doing streaming subscriptions without the many bad decisions made by the many "iTunes killers" that failed to make a dent. Of the top subscription and streaming services, not one has reported profits, so it isn't certain whether these services will pan out. But there's no doubt that they're starting to find an audience at the same time as iTunes — when it comes to music — appears to be standing still.
That said, Apple is still keeping pace with its main competition, and neither Amazon nor Google have launched music subscription services yet. Evidence is mounting that the company is ready to take its first stab at streaming music with a Pandora-like “iRadio” service this year, which would mark the most notable new feature for iTunes in years. An iRadio launch would certainly break iTunes’ long period of stagnation and cause the entire music industry to take note, but the question is whether or not it’ll be enough for the iTunes Store to continue a second decade of dominance.
Lead photo courtesy of Matt Olson