Thank you for writing this. I get so frustrated when I read articles like the one saying iTunes sales are collapsing. What one must remember is that you can use numbers and statistics to say anything you want. The problem is most people are not understanding enough about statistics ( nice way to say most people are plain stupid ) that they see a graph and hear some numbers and they believe it without any further research. We live in a world where if it takes more than 30 seconds then people tune it out.
Once again thank you for writing a to the point explanation of the FUD going on.
Not clear why you state the volume doesnt include TV or movies, I thought I read that since apple doesn't disclose activity the forrester information is based on credit card data. thanks for your additional analysis.
Good debunking of all the media hooplah. Glad to see somebody can still look at statistics and respond sanely rather than trying to hype it into whatever feels like being hyped.
Here is what I had quickly done:
http://img454.imageshack.us/
img4...sicsalesyj9.png
Again, nothing suggests a collapse.
Right now Forrester is likely buying AAPL
I state these figures simply because they are the ones Apple quotes, and they are specifically songs, not movies or TV shows. I'm just trying to be accurate.
I understand the point Josh is making (namely that the average spend as reported on credit card statements is growing more slowly than expected), but I believe the proper interpretation is that the second derivative has declined, not that actual sales have declined. Further, we don't actually have current data about the relationship of the average credit card sale to iTunes revenues. So there are several data points missing in this whole story.
Regardless, thanks for the support all.
Carl
I can't help but believe, after reading articles over a span of several years now, that British newspapers have a propensity for viewing data and sales figures in a very different way. To put it bluntly, the British Press see to take great joy at sticking pins in Apple's rising market share, no matter if we're talking about iPods, G5s with or without Intel processors, iMacs, iTunes, or any of the other i's.
I'm not one to generalize usually, but c'mon folks... can't you see even a little ray of sunshine on Apple's core?
Personally I've purposefully stopped buying from iTunes if I can. DRM can be a hassle (5 household ipods and 3 macs), and I only get a 128bit version of the tune. I usually encode at 196k which is noticably superior with a good set of headphones.
Only if I need something specific for an event (mother's day song as an example), or I need a single track I will buy one. But otherwise I try to by the CD.
Well the Register article was written by Andrew Orlowski who makes a point of slagging off Apple every opportunity he gets.
I might be off on this, but isn't using data strictly based on credit cards significantly flawed? It seems as if every day I go into a new store that has iTunes Gift Cards in the check out line. I have a tween oriented music website and never dreamed of a day where I could get my viewers to BUY music due to the 'credit card' hang-up. These days I'm getting commission from sales and I can guarantee you those cards are the number one reason.
Good point on the gift cards, and as Josh notes in one of his articles, his data doesn't include that stuff. I've added a second update to address a couple of other little gotchas there too.
And thanks Wil for adding your analysis as well. It's great to see another take on the same material.
Thanks to everyone for taking the time to comment,
Carl
Brilliant analysis - too bad the media can't do the same. It's shameful how much misinformation is allowed to be print/broadcast.
Again, kudos for doing what those that are paid didn't.
Please note that if you look carefully at either the Register or the Inquirerer on line that they both have an ax to grind when it comes to Apple and it's products. I am constantly supprised at how often they twist stories just so that they can bad mouth Apple. This fact was mentioned above by another poster but still they catch me with their NASTY BULL SH*T. You would think that I would know better by now not to get sucked in by their troll. Thanks for the Above analysis. It was most informative. Keep up the good work. As for Oloff and the register you can kiss my.... a**.
The Register is anti Apple all the way, so I make a point of not reading anything that they post. The only reason I would log on to their site is so I could make copies of the article to line the bottom of my cat's litter box.
I've seen several positive Reg columns (and quite a few bad ones) about Apple. If it's got anything to do with the iTMS, it'll be bad - they're vehemently anti-DRM.
The other stuff isn't too bad, but much of it is irrelevant to U.S. readers. I always get a good laugh at BOFH...
To start, thanks for "beginning" the endless task of dismantling the total foolishness of Forrester's and the Times.
I wish to urge you to refute and expose to your readers not just the foolish "math" useful by the Forrester/Times but the basic underlying fallacy in regard to MARKETING strategy in all this, as reflected in the NYTimes headline, that the issue of relevance is NOT at all whether or not iPod sales are fueling iTunes sales, but whether "iTunes use [as only indexed or sampled by iTunes sales] is fueling iPod sales.
So, let's do. I humbly submit that there is much more to be said about this unbelievable stuff. I will address the "math" [which you so rightly address] below. But the first problem that, I believe, has to be tackled is the deluded misunderstanding by Forrester of the relationship between iTunes and iPods. Yes, there is, of course, a relationship. But nowhere either in the mind's eye of Apple Computer nor in reality is the iPod intended or capable of driving iTunes sales. Moreover, the profits obtained from iTunes have always been considered negligible. As we all know, but can forget when responding to an assinine argument is to question the entire assumption. The point is that iTunes USE is meant to enhance iPod sales, and not the other way around. And equally importantly iTunes "USE" is not measured strictly in terms of iTunes sales. Clearly, it is the software that Apple is promoting, i.e. , not even "selling", and its use [a] on Windows as well as Macs, [b] in faciliating and organizing music and videos, whether input via CDs [legally as well as illegally already purchased] or other MP3 players [even if not playable on iPods] is meant to encourage sales increases in iPods as well as Macs. Note how foolish one of the conclusions from Forrester is, where the says, the "hypothetical" or "abstract" CONSUMER of iTunes tunes, buys twenty and then "stops". No. No. NO. NO.
What is true is that execs at Apple are sitting and salivating at the fact that whenever 20 iTunes tunes are purchased, they [a] constitute a SAMPLING metric of iTunes 'USE" and acceptance as mainstream software and [b] that "abstract" CONSUMER, simply goes off and, either he or his family members buy another iPod, to either replace and complement their family USE of iTunes and the iTunes world which is opened and organized and facilitated by that software.
As to "math stuff",my reading of the useful graph you present is that iTunes e simply increasing almost linearly and "rate" is roughly constant, as gauged by Apple's figures which seem to be, for some reason, on a 7 month interval between data points. For example, during the 7 month interval between July 05 and Feb 06, iTunes sales showed an increase of 500 units on your chart. Again for the next 7 month interval between Feb 06 and Sept 06, iTunes sales showed an increase of 500 units on your chart. The same rate/slope. Interestingly, in
[continued from above] As to "math stuff",my reading of the useful graph you present is that iTunes e simply increasing almost linearly and "rate" is roughly constant, as gauged by Apple's figures which seem to be, for some reason, on a 7 month interval between data points. For example, during the 7 month interval between July 05 and Feb 06, iTunes sales showed an increase of 500 units on your chart. Again for the next 7 month interval between Feb 06 and Sept 06, iTunes sales showed an increase of 500 units on your chart. The same rate/slope. Interestingly, in the 7 month interval prior to this rate of "500 units/per 7 month", that is, the interval between Dec 05 and Jan 05, the slope of the iTunes sales curve was less, i.e., only 300 units increase in sales over that 7 month interval.
[I cannot,by the way, locate just where the 65% dropoff in iTunes sales claimed by these bozos comes from?????] All I conjecture is that they, themselves are, as you point out confusing growth rate and rate of change of growth rate.
*What I am guessing here is that while increase of iTunes sales has been roughly constant for the past [almost] two years, at 500 units/7 months", a simian might compare the jump in the previous cycle from 500 to 1000 over 7 months [and say that is 100% "increase"], and then look at the more recent increase from 1000 to 1500 over the next 7 months and claim that is only a 50% increase. Close to a possible foolishness, but who knows what these folks are "thinking"----or "not thinking"?? Since you have access to more of their "data' if not their occult reasoning processes, perhaps you can confirm this as the source of their bizarre statement.
As to the coming report of the most recent [likely] 7 month interval. that would clearly include a Dec/Jan period in it's 7 month duration and likely show a jump we cannot see [i.e. Christmas giving, gift cards, etc] and come out again at 500 units increase in iTunes sales for this upcoming "interval reporting".
Again, the basic underlying fallacy in regard to MARKETING strategy in all this, as reflected in the NYTimes headline, that the issue of relevance is NOT at all whether or not iPod sales are fueling iTunes sales, but whether "iTunes use [as only sampled by iTunes sales] is fueling iPod sales.
One thing that many people forgot is that the credit card records probably do not reflect purchases on iTunes Gift Cards. If more people are getting these as gifts they are purchasing just as many songs in most cases, just not using their credit card to do it.
I've made a career out of making numbers say whatever my boss wants them to say without lying. When it comes to guesses, averages, small samples, this makes it even easier. Just be careful what you sample and you can skew the numbers big time in any direction you want (or unintentionally if you aren't careful).
Thanks Carl for being one of the first to debunk Forrester's twist - the word "collapse" was definitely poorly chosen.
As for the numbers, on 10/26, Apple stated, in a press release about BMG Japan being in the iTS, that the iTS had sold over 1.5 billion songs. On 2/23/06, Apple's 1 billion song contest ended. On 7/18/05, Apple's 500 million song contest ended. So the sales rate per day has declined a bit from 2.27 million to 2.04 million (assuming that 10/26 was the actual day of passing 1.5 billion songs. Apple issued a press release on 10/6 about Starbucks Music and iTS that didn't mention anything about song sales, so it's likely 1.5 billion wasn't passed before then. Assuming 10/7 as the date for reaching 1.5 billion would move the rate to 2.22 million). So it's 812 days to the first .5B, 220 days to the next .5B, and somewhere between 225 and 245 days to the last .5B. That's fairly incredible!
In any case, in those times that Apple has made numbers public, we can track that iTS sales generally have been higher in Oct to Feb, and lower in Apr to Sep. This seasonality coincides with Christmas purchases, and with winter and being indoors (for most of the world's iTS accessible population). In fact, Apple did say that the week between Xmas and New Year's has had huge sales at iTS (all those gift cards being redeemed). That simply can explain the slight decrease in the rate.
I'm sure Jobs will give an update at MWSF and my guess is that the rate will have increased once again. And Carl will be there to tell us.
I was going to say, no way, no how.
I just set up my mom with an Itunes account. She had never downloaded ANYTHING off the internet before today...
There is nothing that even comes close to Itunes.
I have downloaded far more songs this year than last year.
I've done an illustration of the problem with using logarithmic plots. I used Graphing Calculator to plot linear, square, cubic, and exponential functions and their logarithms. See this graph. Note that curves that are really accelerating bend over on the logarithmic plot.
However, using the data in this article, it would appear that the iTunes Store sales HAVE dropped off a bit. I used an AppleWorks spreadsheet and converted the dates to months, starting with Jun '03 as month 1. See chart.
Plotted on a straight, linear plot, it looks like there is a decrease in the slope for the most recent pair of figures. The spreadsheet also shows the rate, computed by dividing the change in sales over an interval by the length of the interval, giving sales per month. (This is VERY rough, of course.) Between Jul '05 and Feb '06, there were 71.43 (million, I suppose) sales per month. During the most recent interval, Feb '06 to Sep '06, there were 62.5 million per month. (Note: It's not clear just what DAY of the month the numbers refer to. That could make a difference if, for example, the Feb '06 number was late in the month and the Sep '06 number was early in that month. For example, there might be only 7.2 months in the interval, rather than 8. However, the result might still be lower than the previous period, with that one similarly adjusted.
good points George, but remember the last 7 month interval you utilize for comparison does not include the Xmas/January period, while the earlier one does.
I reiterate though the question is NOT NOT NOT how "iPODS sold yield iTunes sold", but how "iTunes USAGE [very badly indexed by iTunes sales] yields iPODs sold".
Also, the use of iTUNES $ will only produce a complex, non-linear, S-shaped curve and never relate systematically to iPods sold in the long run.
Don't forget that just because credit card sales might be down, doesn't mean Apple isn't selling the same or even more songs. There are other ways to buy iTunes music... have you ever gone into a supermarket, target, best buy, compusa, etc that sell these iTunes gift cards. Well that wouldn't show up as a credit card sale for Apple, it would show up as a credit card sale for those stores.
You didn't mention where u got the itunes figures.
Wikipedia has the ipod ones but not the itunes ones.
Bad maths, Carl.
You don't quote the Soundscan or the Forrester reports, which you should have seen before writing this post. I have seen both, and The Register's reporting is accurate.
iTunes was growing until Q1 this year. It's been declining since Q1.
Forrester data -
iTunes revenue increased steadily from April 2004 to January 2006 . . . The number of
monthly iTunes transactions grew sevenfold, from just over two transactions per 1,000
households in April 2004, to nearly 17 during January 2006 (see Figure 1-1). Over the same
period, the average transaction size almost doubled, from $3.55 to $6.69 (see Figure 1-2).
then...
· . . . but declined for five of the next six months. Since January 2006, the number of monthly
transactions declined 58%, while transaction size fell 17%, leading to a 65% overall drop in
monthly iTunes revenue (see Figure 1-3).
The Neilsen data confirms this is an industry trend. Your choice of logarithmic scale with an axis of zero is designed to obscure the 2006 trend, not reveal it.
When a business unit loses two thirds of its monthly revenue over six months, it should pause for thought.
I'm glad "Blackfriars Marketing" isn't in charge over at Apple! They say getting out of the denial stage is hard.
Thanks Josh. Are you willing to provide a copy of the report to me? I'm not a Forrester client, so I don't have not been able to read it. That was why, in fact, I presented my own data, since I don't have yours.
And let's be clear, music sales are a seasonal business. The "expected" rebound in May seems a bit disingenuous too -- why should we expect a rebound in May? Has Christmas moved? Cherry picking the seven months from January to August does not provide a realistic view of any retailer's business -- so why did your report do that when you could have looked at a full 12?
And Josh, if iTunes revenue declined 65% (no, they didn't lose that revenue -- no one lost any money) in the past seven months, how is it that they sold a billion songs in the past 12 -- and expect to get to their second billion even faster than that? Is it perhaps because they make most of their revenue during the holidays?
Carl
It would seem to me, that one should be tracking iTunes Store sales relative to the number of copies of iTunes in use instead of iPods. You buy songs in iTunes and can use it on a number of iPods. So when I had one iPod, the number of songs that I was purchasing per iPod would be higher than now when I have three, even though I'm buying the same number of songs per my copy of iTunes. Like a lot of people, once I got one iPod, I had to get others, for other members of the family, but our music is still coming from the same pot, my latest working version of iTunes. I don't buy the music 3 times for 3 iPods, I buy it once to go on all 3. If anything, my music store purchases have increased, but I may be buying less per iPod. That's in addition to some of the other arguments put out there such as seasonal sales, iTunes gift cards, etc.
Josh,
The iTS credit card data is totally discredited as people can buy iTS cards and certificates from thousands of outlets now, and can use PayPal.
So if the Neilsen Soundscan data shows an Apple drop-off of 65%, how did Apple sell .5 billion songs between 2/23/06 and 10/26/06, which is only slightly less than the rate used in selling the previous .5 billion from 7/18/05 to 2/23/06?
Explanations? Could Soundscan be wrong? Or is Apple lying?
I'm glad you're not in charge of analysis at Apple.
Your choice of a loogarithmic, cumulative graph tells us what happened in the distant past, not what is happening now. Especially because the most recent data is logarthmically squeezed into the smallest section of the graph.
The truth is that over the last year people's choices of where to buy music have exploded. Their are untold numbers of pay-per-download sites. There are several hundred thousand people using all-you-can-eat subscription sites. There are Sirius and XM. Recently the phone companies have been marketing heavily and taking a big chunk of download revenue. Apple is no longer competing with poorly funded geek companies but with an entire eco system that is reacting against it. And it shows in iTunes sales volume, which plateaued early in 2006 and have been declining since.
Though Apple itself is not a bad shape ..its music business is going downhill and please face it you all die hard apple fans ... No business can survive by selling hardware at 4 times it costs to make them. This article is more or less a poor attempt to cover up the IPOD bubble that is soon going to go burst.
A few guys out here will read this and will exactly know what I am talking about...lol. To begin with - you can easily get subtle hints if you observe the excess amount of Refurbuished ipod being peddled at he the Apple US webite and online stores like ubid. A lot of folks are switching to better devices from Creative/Sandisk and IRiver , not to forget those cheap 8GB nano look alikes flooding on ebay for less than $100 with 2 X times the features of Ipod. You would say "cheap chinese knock offs" ..but wait ..doesnt apple make the nano on the same production lines in china 
)
This is definitely the beginnning of the end of Apples music business..
Excellent analysis of the data and a great piece of writing. Thank you for setting the record straight.
Netrana
I've been listening to the naysayers foretell of Apple's doom for over 30 years now -and each time Apple have proved them ridiculously wrong. Yes there are chepaer knock offs - but none as elegant - and dont forget the prepaid card sales and multiple ipods per family effects. (my family has 4 ipods) But the bottom line is that NO company gets style as well as apple (show me ANY Windoze PC that isnt in a piece of crap box -Sony came closest but still a distant second) -and for you uber-geeks, style and class still count for a lot - people are WILLING to pay more for an item if they perceive it as of excellent quality, at the forefront of technology, and staying ahead of the pack. Dont bore us with your techno analysis - if thats the argument your pushing then BMW, mercedes and porsche would have disappeared years ago. So would starbucks, neiman-marcus, Singapore Airlines et al. Of COURSE sales will slow a bit as competition increases - big deal -the business model is sound for the near future - and ultimately, who CARES if there IS a bubble - theres ALWAYS that next new gadget that everyone will want -and guess what? Apple has been on that cutting edge now for quite a while. I think they'll know what the public wants for quite some time unless they totally drop the ball or Steve goes crazy. Ten BILLION in cash reserves people - do you really think theyre going to sit on that and head for tahiti?
netrama,
the bottom line is how many new iPods are being sold, and whether iPod owners are adding or replacing them with iPods.
last quarter, analysts were saying that iPod sales were slowing and that topping last year's 14m+ iPod sales in this quarter was unlikely. Now those same analysts are saying that surpassing 14m+ is a sure thing, as they suggest from 16 to 20m iPods sold. 16m would be 10% yoy growth, 20m would be over 40% growth.
a couple of weeks ago, a survey reported that even among those who already own an MP3 player, over 70% were still choosing to buy iPods.
So contrary to your prediction, Apple is just at the beginning of its entry into the home entertainment business. Since I own Apple shares, if you don't think so, just go ahead and short Apple's stock.
Great Points!!!!!!!!!!!!!!
Interesting subject
Commenting by HaloScan
