If the troubled music industry has been looking to Steve Jobs as its saviour, it might be time to look somewhere else.
While the charismatic co-founder and leader of Apple Computer Inc. has made the iPod portable music player a favourite gadget and turned iTunes into the world's largest market place for legitimate downloads, the online operation accounts for only a small slice of people's music spending.
“The iPod is not necessarily a machine for generating revenue for the music industry,” Josh Bernoff, an analyst at Forrest Research Inc., said in an interview from Cambridge, Mass.
After analyzing thousands of credit and debit card transactions over a two-year period, Mr. Bernoff found that Apple has historically been able to sell only 20 songs on average for each iPod device sold.
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“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,” he concluded in a new report.
Years ago when CD players were introduced, consumers rushed out to buy new music libraries. Clearly, the iPod is not having the same effect on content, he said.
Over the past 12 months, 3.2 per cent of online households in the U.S. made a purchase off iTunes, but the size of their purchases was relatively small. More than half spent less than $17 (U.S.), about the price of a single CD in many stores.
Mr. Bernoff questions whether consumers are reaching their saturation level for music downloads. He found that iTunes' rapid expansion rate has slowed. The service grew sevenfold between April, 2004, and January, 2006, but since then the number of transactions has dropped by 58 per cent.
The downward trend is not limited to iTunes, which, according to Apple, accounts for 88 per cent of music purchased off the Web in the United States. Sales of all music downloads in the U.S. have stalled in the second half of the year, falling from 144 million tracks in the first quarter to 137 million in each of the second and third quarters, according to Nielsen SoundScan, which tracks industry figures.
The trend is unwelcome news for the industry. Illegal downloads have chiselled billions of dollars out of the music industry's revenue base over the last six years. In the U.S. alone, annual sales were down 23 per cent between 1999 and 2005 to $11.2-billion, according to the Recording Industry Association of America (RIAA).
Apple executives didn't want to comment on Mr. Bernoff's report, but the company released a statement through a spokesman, saying iTunes accounts for almost 6 per cent of all music sold in the U.S. Globally, Apple has sold more than 1.5 billion songs and nearly 70 million iPods.
(Apple reported total revenue for its fourth quarter of $4.83-billion, of which $1.56-billion came from iPods and $452-million from iTunes.)
But the success of iTunes is not proving strong enough to offset the music industry's losses. The RIAA says that even with the amount of music purchased online increasing, the combined value of physical product and legitimate digital downloads declined by 6.1 per cent in the first half of the year.
Mr. Bernoff says one way to change consumer behaviour would be for the industry to do away with the protection tools attached to digital music files that restrict where they can be played.
Most iPod owners are filling the devices with music they have burned from existing CD collections or downloaded for free, says Roger Kay, president of Endpoint Technologies Associates Inc., a research firm in Wayland, Mass. Ultimately, though, he thinks purchasing music online is the only model that makes sense for distributing music.
“We are in a mid-transition period between analogue and digital that will end around 2010 when everybody will be digital,” he said.
