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Authorized Digital Music Downloads in Decline
December 13, 2005
Thomas Mennecke
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It's Christmas time, which gives people a great reason to buy more even electronics. MP3 players, DVD players, computers, GPS navigation units, HDTVs...with prices dropping faster than a private torrent on BitComet, all these gadgets are flying off the shelves.

There is one fly in the ointment however. Music downloads from industry-approved services such as the mighty iTunes, Napster or Rhapsody has leveled off from last (third) quarter. In fact, sales as of November 27 have actually shown a slight .44% decrease according to Neilson Soundscan.

This drop off presents an interesting conundrum. Digital download sales have not been vigorous as in the past, yet MP3 sales continue to soar. Led by the over priced yet fashionably functional iPod, MP3 players are one of the hottest gifts around. According to some, that may be the exact problem - especially the folks over at Napster.

Napster hasn't faired well in the digital music distribution business. Since converting from a wildly successful P2P network, it has been unable to compete with Apple iTune's 80% plus market share. Napster's exact market share is not known, according to their own Chief Technology Officer Bill Pence. With so many other smaller entrants into the market, it is generally perceived that Napster makes up less than 10% of all digital sales.

This is all OK to Apple though. A stagnant digital market place means little to the reinvigorated company. Apple has sold over 30 million iPods, with no slowdown in the foreseeable future. Its profits have soared as stock prices have nearly doubled in one year. In addition, Apple has added 1 million new Mac users since last December. Things are only looking up for Steve Jobs, founder of Apple.

The reason why Napster, or anyone else for that matter except iTunes, has not faired well is up for debate. Clearly Apple has led a brilliant marketing campaign by closely associating iTunes with the iPod. Just throw any gadget with "i" before it, and watch it sell. Brilliant yet simple. Apple also has kept tight control over it 99-cent download per song tactic - keeping the price just reasonable enough to make iTunes a convenient source.

But Apple's grip on digital music business has managed to infuriate not only its competitors (if Napster can be considered one), but the music industry as well. A war of words erupted between Steve Jobs and the music labels, which he called "greedy" for wanting to raise prices. The music labels struck back, insisting Apple institute variable pricing. The 99-cent download per download is simply not yielding the kind of revenue they have thus far expected.

Armed with the knowledge the digital music distribution market has stagnated, the music labels may have more ammunition when iTune’s prices are renegotiated in 2006. Others are struggling, yet the status quo is working perfectly for Apple.

According to Neilson Soundscan, the justification for the stagnation is placed squarely on file-sharing. iPod and other MP3 owners are opting to fill their players by physically swapping files or by simply downloading them from various P2P networks.

Yet placing the blame on file-sharing doesn’t address the larger problem: Why are people opting to participate in P2P rather than authorized services? Napster can toss blame around and claim iTunes’s proprietary file format is incompatible, but the underlying problem stems from much more than that. Napster remains non-competitive because it doesn’t provide what the consumers wants – P2P does. Renting songs for $14.99 a month, which vanish when your subscription runs out, hints towards the fundamentals of Napster’s woes.


This story is filed in these Slyck News categories
Authorized Music Store :: iTunes
Authorized Music Store :: Other

You can read more on this from Businesss Week

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