The Changing Digital Music Landscape

Apple Computer made two headlines last week that will have significant impact on the future of the music industry’s efforts to shape the digital delivery conversation. The first—in which Apple Computer’s defense against Apple Corps’ litigation that the iTunes store was in essence Apple Computer’s move into the music business, began to clarify the legal difference between content creation and content delivery. This ruling, while under appeal, may provide benefit to emerging peer-to-peer network tool providers.

The second announcement, that Apple had successfully maintained the 99-cent per-song rate in negotiations with major music labels, shows how formidable Apple’s stance in delivering digital music downloads has become: it currently dominates—to the tune of almost 80% market share—a market that has now risen to an annual rate of 353 million songs.

Music labels Sony BMG, Universal, Warner Music, and EMI—have been pressuring Apple for at least a year to introduce variable pricing that would see more popular tunes sold for above one dollar.

"Apple has all the cards, and when you have all the cards, you can play hardball," said Ted Schadler, analyst at market research firm Forrester Research.

An AP article also notes that "none of the negotiating parties would say how long the deals would last," but analysts interviewed for the article "suspected the record labels insisted on shorter-term contracts."

Apple’s ability to maintain the 99-cent rate as it has since the inception of the iTunes store in 2003 also shows the additional leverage the company is able to place on the labels, many of which are part of larger entertainment groups. Apple is both enticing and cajoling the entertainment groups with access to the same delivery platform for their TV and movie offerings. To sell a billion songs in three years’ time is an impressive feat but only accounts for about 5% of the total music market; if iTunes can do the same for TV shows or movies, however, it will have a much bigger impact on the entertainment groups’ bottom line.

For Apple, as well as its rivals, music and music-related accessories continue to occupy a growing portion of overall revenues. Apple’s iPod sales already account for a significant amount of the company’s annual revenues, and analysts expect music downloads to account for almost 5% of the company’s annual revenues by the end of 2006.

Loudeye, one of the early companies in the digital music content encoding and delivery space, sees a much higher percentage of its revenues from music delivery. In the most recent quarter, $6.4 million of its revenues came from its digital media store services, accounting for more than 75% of the company’s total revenues. Most of these revenues came from Loudeye’s OD2 service, which creates private label music delivery stores, totaling about 75 digital media stores in Europe, South Africa, and Australia. OD2 was originally created in Europe in 2001 by musician Peter Gabriel.