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Why iTunes Won't Sing the Subscription Song

By Andrew K. Burger MacNewsWorld ECT News Network
Jun 29, 2007 4:00 AM PT

Rumors that Apple will launch an iTunes subscription service seem to emerge on a regular basis.

Why iTunes Won't Sing the Subscription Song

They resurfaced in December after a Forrester Research report concluded that iTunes Music Store sales were collapsing. Median household spending on downloads amounted to US$3 about six times per year. However, these statistics may be seasonal as opposed to a long-term trend, lead analyst Josh Bernoff pointed out.

The rumor rose again in April despite continuing growth in iPod sales and the announcement that EMI's entire music catalog would be made available on iTunes free of DRM (digital rights management) protection. At that time, Intent MediaWorks CEO Les Ottolenghi told reporters Apple was considering launching a subscription service within the next six months.

The downward trend in music download revenues isn't limited to iTunes, or to pay-per-download music sales. Nielsen Soundscan reported that whether downloads are subscription-based or on a per file basis, sales are declining steadily.

While research shows that consumers still prefer to buy CDs via the Internet, CD sales have declined 20 percent during the past five years. "The message here is not that CD sales are coming back, the ability to obtain pirated music is now so widespread the DRM looks to consumers more like a problem than a benefit," Bernoff wrote in a research report.

The Case for Pay-Per-Download

For music consumers there are pros and cons to the pay-per-download and subscription models. It is more difficult for users to get a sense of the value they are receiving with subscription models as compared to pay-as-you-go, according to Max Blumberg, founder of venture capital consultant The Blumberg Partnership.

"It's a bit like gym memberships. Gyms make money on the fact that many people take out subscriptions, but do not use their facilities regularly -- at least after their initial enthusiasm. Pay-as-you-go is more transparent," he told MacNewsWorld.

Moreover, the Apple-iPod "cool" factor has brand value. Even if iPod users calculated that pay-per-download was more expensive than a competing subscription service, users would still be willing to pay that premium, at least up to a certain point, he continued.

When it comes to music and media services "in general, buyers are becoming more educated and it is less easy to mislead them," Blumberg commented. "They prefer fairly priced pay-as-you-go where they can see exactly what they're getting compared to subs where it is more uncertain. This also suggests that buyers' individual risk profiles may influence their pay-as-you-go versus subs decision-making.

"Pay-as-you-go is the modern transparent approach for increasingly sophisticated buyers who know what they are looking for and understand the potential hidden costs of subscription models -- for instance, one purchases subscription capacity that one never uses."

The Case for Subscription Services

Many people find the wide and deep selection of music and convenience of subscription services compelling, according to Kevin Arnold, CEO of IODA, the Independent Online Distribution Alliance.

Much like cable television or other content subscription services, subscription services work on the basis that customers have access to a huge catalog of music as long as they subscribe; they lose that access if they cancel, Arnold told MacNewsWorld.

"Many people find the low monthly cost for access to a large catalog compelling for sampling a large variety of music via their computer and portable devices as opposed to paying much more to 'own' the files. Concerns about managing a large music collection and hard drive space, moving files around, backups, etc., are also made moot with subscriptions," he added.

Subscription Options

"I certainly can't speak as to Apple's strategy with iTunes, but one theory on subscriptions from the label perspective might be that if every current iTunes user was paying $10-20 per month for a subscription service that there would be much more spent overall on digital music than with an a la carte ownership model," Arnold commented.

There are at least two distinct ways to offer a subscription service, according to Susan Kevorkian, a consumer markets program manager for IDC.

"One way is to offer a given number of owned downloads for a monthly fee, such as eMusic does today," Kevorkian told MacNewsWorld. "Another way is to offer access to an unlimited number of 'rented' tracks for a monthly fee, such as services based on Windows Media Technologies platform do today. Napster is one such service. Those services have been slow to gain traction with consumers, who aren't accustomed to the rental model for music."

IDC analysts believe Apple would be better off using the former option as video becomes a more prominent feature on its devices (iPhone, iPod) and as the iTunes Store video library continues to expand, she added.

"Apple could offer bundles of owned songs and videos for a monthly fee, and appeal to consumers with competitive bundle pricing combined with owned, not rented, downloads," Kevorkian suggested.

Enter Ad-Supported Services

The pay-per-download vs. subscription model debate may soon be eclipsed and laid to rest before being settled conclusively. While companies such as Apple and Napster have been busy getting hand-held equipment and networking technology right, fast growing social media networks such as Imeem are focusing on the way music fans search for, enjoy and share music.

The company on June 20 announced a partnership with Snocap, a provider of direct artist-to-fan online music distribution technology, to compensate artists through ad-supported revenue sharing when their music is streamed on the Imeem service.

The service launched with 3 million tracks from Imeem record label partners including Beggars Group, Matador and Om Records, artists such as the Barenaked Ladies, Jimi Hendrix, Sarah McLachlan, M.I.A., Public Enemy and Thievery Corporation, and distributors such as IODA, IRIS, INgrooves, The Orchard and Redeye Distribution.

"Imeem combines music discovery, sharing and social networking with a revenue stream," said Simon Wheeler, director of digital at Beggars Group. "With this launch, Imeem is showcasing what can be delivered when technology works with rights holders to deliver compelling music services to music fans."

Building a Music Community

"Imeem launched an ad-sharing music service, because we think this is the best approach to music online that ends up benefiting everyone," explained Imeem's Gina Wilkinson. "Musicians and labels get to connect with a vast interactive fan base online, and they get a cut of the revenue from their streaming music. Users get to discover, recommend and listen to streaming music for free thanks to advertising on the site. If they'd like to own the music, they can click on the 'buy' link and purchase it through iTunes or Amazon."

Record labels like subscription services because they offer predictable, recurring revenue streams and because they provide labels an opportunity to collect valuable data from consumers, added Steve Jang, Imeem's vice-president of business development and marketing.

"However, the Web was built around the idea of attention and eye-balls, not monthly service plans," Jang told MacNewsWorld. "Imeem is focused on providing the most engaging user experience, which means that we give people free access to discover and share music with a growing community of over 16 million users, and support it through advertising. Imeem's ad-supported business model enables users to freely access and socialize around music, which offers far-greater monetization opportunities."

Along with settling the DRM issue, ad supported business models are viewed by some analysts as a key to growing the market, which for after all is said and done is not that large.

"In 2006, we saw U.S. television ad spending reach over $76.3 billion and radio ad spending reach $12 billion," Jang explained. "Digital global music sales barely reached $2 billion. As more advertising dollars are allocated to Internet ad spending, we will see our model scale with the times. Additionally, the users on our site create self-selecting communities around similar interests, which resonates with advertisers, because they know people are engaged and want to be there."


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