iTunes and Digital Downloads: An Analysis

On June 5, 2003 Apple Computer held a half-day seminar at their campus in Cupertino, CA to introduce their iTunes Music Store to the independent label community. Future of Music Coalition representatives Kristin Thomson, Brian Zisk and Shoshana Samole Zisk were in attendance and here's what we learned:

iTunes Home Page is integrated into the iTunes jukebox.

The Basics
iTunes Music Store is a virtual record shop where you can buy and download either complete albums or individual tracks from many major artists of different genres. Unlike some other digital distribution services, iTunes is not a stand-alone website or a subscription service -- it's an entire application that's integrated into the iTunes jukebox software that's downloadable for free for Mac users.

Single songs are all priced the same -- 99 cents. Albums are priced at a range between $7.99 and $12.99 but the vast majority are $9.99, a price point that Apple encourages for consistency. There's no monthly subscription fee, and no sign up charges.

What happened when I searched for "PJ Harvey" through the search function -- I got a complete list of PJ's songs off of her seven records. Note you can click the "buy song" button on the right to purchase a single track, or you can ";buy album" up at the top. Plus, if you click on her name up in the blue area it opens up her own artist page.

Who Can Use It?
Right now iTunes is available to anyone with a credit card and a US billing address. However, at this point, you also need to be a Mac user running OS 10.1.5 or later. Apple has only a small sliver of the consumer computer industry -- about 3 percent -- and even fewer of these folks have upgraded to the latest Mac operating platform. Despite this, Apple was proud to announce that they'd had over 3.5 million downloads since the store launched in early May [now 5 million as of June 23]. As good as that is, things are predicted to explode when Apple releases a Windows version of iTunes, which they said they'd like out before Christmas.

Why Apple Built It
There were two phrases that were repeated a lot during this seminar, one of them being
"We wanted to build a system that lets honest people stay honest". There's a strong belief at Apple that, given an easy and reliable way to download music, consumers WILL gravitate to legal digital download systems instead of using illegal systems like Kazaa or Limewire.

Other legal systems exist -- eMusic, Rhapsody, Musicnet and Pressplay to name a few -- but to this point they've had limited success competing with "free", mostly because the systems have had difficulty licensing content, or they've placed so many restrictions on the downloads -- songs that "time out" after a certain period of time, songs you can't burn onto CDs or move onto a portable player, etc -- that consumers have been turned off.

Factoids about Apple and iTunes:

• Launched May 2003 with 200,000 songs from all five major labels
  
• Operates on Macintosh platform only, running 10.1.5 or later
  
• Had 1 million downloads in the first week
  
• Had 5 million downloads in the two months
  
• Apple is adding thousands of songs a week
  
• 45 percent of all songs have been bought as an album download
  
• More than 75 percent of the songs in the store have been downloaded at least once
  
• They’ve served up over 40 million 30-second previews – about 10 previews per purchase
  
• There are about 6-7 million copies of iTunes in use right now
  
• Apple has sold nearly 1 million iPods so far, making it one of the most popular players in the world

It's clear that Apple has a number of assets that has made it easier for them to "compete with free." First of all, they own or have licensed every portion of what's needed to make their store function -- from the bandwidth, to the one-click shopping capacity, to the credit card processing capability, to the computers, the software, and the iPods. They're also a company with cash in the bank and a long track record, which means they're not trying to fund a startup plan on the backs of musicians and labels.

It was a combination of all these elements plus Apple's integration of a digital rights management system that allowed Apple go to the major labels with leverage that no other company had. As they tell it, Apple went into negotiations with the major labels saying they were willing to spend a significant amount of money to build a legal alternative to Kazaa et al but, in return, they insisted that the labels agree to a broader set of user end rights -- giving music consumers more options about how they can listen to and store their music. So, iTunes users are allowed to:

• burn CDs of their purchased songs
• put songs on unlimited iPods
• put songs on 3 computers
• buy songs on a per-track basis (as opposed to just albums)

This gives iTunes the most liberal policies seen on the consumer's right to use of digital music and, many would say, make the iTunes Store more compelling.

How Apple is Combating Piracy
Apple's success in convincing the major labels to join them in this endeavor is based on Apple's integrated (but invisible) anti-piracy measures. Songs are encoded in AAC format at 128 KB/sec. AAC is a compression format that Apple has licensed from Dolby that is apparently better sounding and better at compression than the more familiar MP3 format. Plus, AAC works in conjunction with Fairplay -- a digital rights management system that blocks certain file uses in an attempt to reduce music piracy. Without getting too technical, basically songs are encrypted when consumers download them to their computer, and songs are tied (in a transparent way) to the user's Apple account, making it relatively difficult for the average computer user to re-post any songs bought through iTunes to any free download sites.

Apple admits that they cannot stop piracy altogether, but they think their liberal user rights combined with subtle but strong anti-piracy protections -- not to mention Apple's very cool and simple store interface and broad song selection -- makes their store "better than free" for the average music fan.

Other cool stuff iTunes offers from the consumer end:

• 30-second previews of EVERY song
  
• a decent amount of information about the albums, including cover images. No liner notes yet but it’s on their “wish list”
  
• After the user sets up an account with Apple, there’s one-click purchasing for both albums or songs, meaning buying a song is as easy as clicking a button.
  
• songs purchased are instantly stored in your iTunes music folder on your computer and appear automatically in your own iTunes playlist.
  
• Apple has a huge amount of bandwidth so download times are surprisingly short (though I have a DSL connection)
  
• If you have iTunes and an iPod, there’s a seamless synchronizing between the two so your iPod will carry an exact copy of your iTunes catalog.
  
• Easy to browse in a variety of ways for music – by artist, song title, album title, or genre. Many people at the event asked whether Apple would add a browse by label feature, which is important for many of us whose labels have a recognizable identity. They seemed receptive to the idea, but no promises.
  
• ITunes “home page” includes info about top downloads of the day, top downloads ever, new releases, new additions to the Apple catalog (back catalog stuff)
  
• Apple sends out an email every Tuesday AM with the latest listing of additions and new releases.

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