I minor triviality I'd like to point out for the benefit of your readers. The last sentence in the second-last paragraph of this article has an extra negative mistakenly inserted, thus seeming to reverse its meaning and making it rather nonsensical. I'm fine with you deleting this comment after the correction has been made.
It's definitely an interesting way of doing business.
Apple basically uses the store to support iPods. Apple has said repeatedly that the store runs a little better than break-even and reports say that the labels tend to pocket two-thirds of every ninety-nine cent song (here in the US), leaving Apple with one-third to run the store on and pay for things like bandwidth, credit card processing, etc.
Compare that with the Napsters and the like who have to make a decent profit and they have to convince the labels to take less.
Personally, I think this is why other services push the subscription model. As I understand it, the subscription model works on a micropayment system, where the labels get paid every time you listen to a song. One of the reasons you have to "dock" your player is that the information goes up to the service which notes what you listened to and the service then writes an appropriate check to the labels. But the service is the one who gets your $14.95. If you don't listen to any music in a month, the labels get squat but the subscription service still gets your $14.95.
One thing that the music industry was afraid of was that they had created, in Apple, another MTV. When MTV first started (back when they played music videos), the labels charged next to nothing to MTV to play the music videos--it was all promotional. MTV took off and made a ton of money and had to pay next to nothing for it's programming--music videos. It became so big that when it became time to renegotiate, the labels had a hard fight to get more money out of MTV. Apple is in a similar situation today. With the lions share of digital downloads and promotion through the iTunes Store, Apple can pretty much set the terms they want. The labels only stance is that they will pull their music, which is mostly a M.A.D. (Mutually Assured Destruction) ploy because it will hurt both Apple and the labels.
Yeh, I was surprised that the mac media weren't all over this because it reads very positively for both iTunes and Apple's way of doing business.
However being an unattributable source, the info remains mere here-say. I would really like to see a breakdown of the returns for downloads from all sources - it would put the lie to a lot of the speculation regarding the different financial models of all the services.
I won't hold my breath, I guess that sort of revenue info is kept very close.
It seems like I made my own typo mistake in the very first word of my nitpicking post!
Anyhoo, regarding Peter's comment ... I don't really buy the idea that Apple is the only company that can afford to return a hefty percentage to the labels, because mathematics tells me otherwise.
Apple does "a little better than" break-even on 33% of the take (I'm going by Peter's figures -- I don't know if the one-third portion is actually the case). So let's call that break-even at 30 cents. If another service wans to compete with Apple, make a profit, and still return the majority of the cash to the label, it seems that there is plenty of room there for them to do so. Even keeping up to 49 cents of the retail price instead of 30 cents should provide them with a healthy profit, and still leave over 50 cents for the labels and artists, assuming they are priced competitively with Apple.
Perhaps their cost structure is substantially different, but I still *can't* see any justification for only ceding pennies on the sale to the supplier. Unless, of course, this comparison is wholly and entirely confined to the subscription model versus iTunes. (Something the article doesn't make entirely clear.)
I realise that some outfits like eMusic sells for as low as 30 cents a track, but as I understand it, this is the bargain basement and not the norm for an Apple competitor. (It is certainly not the normal purchase price for a WMA-encoded track, which is usually much closer to or even higher than the iTunes bar.)
So... I anticipate these labels will terminate providing subscription services, pronto? I would.
Yeah ... and guess what happens to the users' tracks from a label when that label decides not to participate in the service anymore? NO MORE MUSIC FOR YOU!
Subscription sucks, period.
Many thanks for all the comments and the typo correction. The post should read correctly now. The perils of writing a thousand words a day....
One of the things to check out in Apple's financials is that the iTunes store does actually make money as a store nowadays -- it's not just about selling iPods. My understanding is that Peter's numbers are about right -- the labels get 70 cents out of 99, while Apple gets about 29 cents to pay for bandwidth, servers, etc. All that said, it is showing a profit and a growing profit at that. You can see our projection of the trend under "Other music" in our Analyzing Apple report at http://blackfriarsinc.com/A07Q2B-Web/fig-2-1.html. Yes, the revenue dollars have been relatively small to date (assuming you call about half a billion dollars small), but the growing number of iPods, iPhones, and Apple TVs are going to drive those numbers up quickly.
One caveat I would offer is that the label interviewed for the article is clearly a small one and therefore isn't getting the best deals from the music retailers. It is possible that the likes of Sony and Universal do better than he reports on the subscription side of the business. But given what I know of the Rob Glasers and Bill Gates of the world, my assessment would be "unlikely." Both of those guys believe in getting stuff for free and selling for lots of cash; I don't expect they are changing their spots just because this is the music business.
I believe Jobs actually has a soft spot in his heart for artists. Having run Pixar, he's been on the other side of the table in these negotiations in the movie business, and I truly believe he wants artists to get reasonable royalties for their work, and that's why he has structured the iTunes business the way he has. The deals he has struck with the labels have demonstrated that belief. However, as he gains more market pricing power, I also expect those deals to be less favorable over time unless they can prove that the artists are sharing in the bounty. There's a lot of evidence to date that the labels aren't doing that as much as we'd all expect.
Again, thanks for reading and your thoughts!
Carl
Apple (and others) may be using a progressive scale whereby it pays a greater percentage per song to the labels when there is greater sales volume. That would take into account Apple's fixed costs to run the store. And could partially explain the strange mathematics in that original article.
Commenting by HaloScan
