Original URL: http://www.theregister.co.uk/2006/09/15/zune_vs_ipod_readers_digest/

The iPod's Achilles Heel? It's er... Reader's Digest

Zune, eMusic, and subscriptions

By Andrew Orlowski

Posted in Media, 15th September 2006 14:07 GMT

Analysis One of the most interesting aspects of Microsoft's would-be iPod-killer Zune isn't technical at all. It has nothing to do with colour screens, codecs or disk capacity.

But someone at Microsoft thinks they've found what may be the Achilles heel of Apple's end-to-end music delivery system, of which the iPod is simply the best known part.

And it's all about how you acquire music.

The iTunes store has been vital to the iPod's success, which in turn has been the engine behind Apple's recent growth. iTunes dominates the legal download market in the same way the iPod dominates the MP3 player business. It's hard to remember now that for the first year of its life the iPod was a flop. But once Apple introduced iTunes for Windows, the mass market perception of the device changed from one of expensive luxury to convenience item.

Instead of requiring the consumer to take an extra step, the iTunes system removed a step. Remember that everyone who wanted a budget portable CD player pretty much had one already, and acquiring CDs has never been a problem. A digital acquisition system removed the "Burn" from "Rip, Mix and Burn", with music flowing seamlessly to a device that was always in sync with your music collection. So "Rip, Mix and Burn" became "Rip, Mix and .... just take it with you".

Of course the cost of this convenience is pretty high - and is still born by the punter eventually - but the consumer perception of ease and convenience had to be there for the iPod to be a success.

Today, if you can get music industry types to agree on anything - and don't forget that the jostling between indies and majors, between publishers and recording rights holders puts any flame war in the shade - it's that the iTunes Store isn't the future of music. And after more than three years, this is a consensus that's based not on wishful thinking, but empirical evidence.

Principally this is because iTunes doesn't make money for anyone except Apple. In itself, the iTunes Store barely breaks even - but it fuels the much more lucrative downstream bit of the delivery system. iTunes sales remain vanishingly small as a proportion of the music business, but most importantly of all, iTunes doesn't generate money for anyone except Apple. Broadband providers, PC manufacturers, insurance companies, and the battery-replacement services have all profited in some way from the iPod's success - but no one in the music value chain. Steve Jobs doesn't even leave crumbs on the table.

Then again, Apple doesn't really care what bits pass through its store, or how much revenue they generate, so long as it keeps giving people reasons to fill up their iPods. Audiobooks? Fine. Podcasts? Why not. Videos and games? They're just more bits - and more reasons to keep returning, and keep buying iPods.

The average iPod owner has done little more than dabble with Apple's store, figures show, carrying an average of 21 iTunes-purchased songs. Extrapolate those numbers to the wider market and you'd have figures suggesting the public has suddenly stopped acquiring music. That clearly isn't true - they're simply getting it from other channels: physical and illegal-digital.

So in business terms, the iTunes Store is a deceptive chimera. Pakman has a joke he likes to illustrate it.

"The iTunes Music Store [ITMS] buyer buys 25 songs in the first year, 15 in the second year, and in the third year, the battery has died, so you have to go out and buy a new iPod," he says.

But in putting together Zune, Microsoft has taken note of this year's digital music success story, eMusic. With its 'Reader's Digest' subscription model, eMusic has risen to No.2 in the legal downloads business, grabbing 13 per cent of the market, and growing far faster than its rivals.

Now every company wants to be in the subscriptions business - it means costs and revenue are predictable, and while the cost of acquiring a punter is higher, this can be amortized over a very long time period - possibly a lifetime. (And if you're really lucky, you can keep billing them after they've died). But labels love subscriptions more than most, because it gives them a chance to monetize their dormant back catalogs. They've wanted to do this long before the idea acquired its most recent buzzword, "Long Tail", and eMusic has become the model for low volume aggregation.

eMusic's success is laudable because it hasn't been able to secure catalogs from the majors - it's a tribute to the independent sector, which CEO David Pakman estimates makes up 40 per cent of the music market, depending on how you count it.

From the labels' point of view, eMusic is simply great for business. While it costs eMusic much more to run its store than Apple - because it offers much more than an "airport kiosk" looking to attract impulse hit-buyers - it's more profitable. eMusic employs over a hundred people providing editorial content, and it works very hard on expert-generated and user-generated recommendations. But the value for labels is greater, because the eMusic store exposes material people woudn't otherwise see. (In his desire to make the "Long Tail" a one-shape-fits-all buzzword/religious cult, author Chris Anderson wrongly lumps iTunes and eMusic together as examples of "Long Tail", although one is, and one emphatically isn't). eMusic fuels the value chain.

What Apple has, then, is a subscription scheme for buying hardware - each device rapidly expires, and there is only one supplier providing a repeat purchase that's compatible with your iTunes Store purchases. What the music business wants is a subscription scheme for buying music. Somewhere in the middle they may one day meet.

(Unless ... they agree they'd shift more respective units under a flat fee. With a universal subscription, we suspect, Apple couldn't build iPods fast enough to meet demand, and would begin to rival GM in size. It has the best digital music player, bar none.)

Where does Zune offer Microsoft some hope? Surely not in the Soviet-style industrial design - and surely not from gimmicks such as disappearing, time-bombed songs. Or the fact it brings another incompatible DRM scheme to the public. And while it may do more than the iPod, unless it does the basics very well or better, it'll suffer the same fate as Microsoft's phones. Which also do lots of things, none of them particularly well, and which only gadget-heads want to be seen with.

But where Microsoft can gain some rare good-will from the music business is by nudging the public to a subscription model. Not something in the company's DNA, you may say, but there are plenty who want to see Apple nudged there too. ®