Original URL: http://www.theregister.co.uk/2006/12/11/digital_downloads_flatline/

iTunes sales 'collapsing'

Digital flatline looks ominous for music labels

By Andrew Orlowski

Posted in Financial News, 11th December 2006 19:49 GMT

The leading DRM digital download service, Apple's iTunes, has experienced a collapse in sales revenues this year according to analyst company Forrester Research.

Secretive Apple doesn't break out revenues from iTunes, but Forrester conducted an analysis of credit card transactions over a 27-month period. And this year's numbers aren't good.

While the iTunes service saw healthy growth for much of the period, since January the monthly revenue has fallen by 65 per cent, with the average transaction size falling 17 per cent. The previous spring's rebound wasn't repeated this year.

And it isn't just Apple's problem. Nielsen Soundscan has grimmer news for prospective digital download services, indicating three consecutive quarters of flat or declining revenues for the sector as a whole.

Speaking to The Register, Forrester analyst Josh Bernoff warned against extrapolating too much from the figures.

It may reflect a seasonal bounce that hasn't yet manifested itself. However, it might not.

"There's no indication of enormous growth coming," he told us. "When you look at this alongside the SoundScan numbers, you may ask 'Where's the part were we're supposed to get excited?'."

The ominous trend comes despite healthy growth for digital music players - iPod sales quadrupled in the period monitored by Forrester - and Apple's growing inventory - the company has added videos and movies to its established inventory of music downloads and audiobooks.

Three times a year

Forrester revealed some fascinating details about iTunes purchasing habits. Some 3.2 per cent of online households (around 60 per cent of the wider population) bought at least one download, and these dabblers made on average 5.6 transactions, with the median household making just three a year. The median transaction was slightly under $3.

No one in music gets rich from a stampede of interest like this.

(The figures don't include gifts redeemed via the iTunes Store. While Apple can argue this does not reflect the volume of transactions taking place, it gives a more accurate picture of what customers are actually prepared to pay for.)

Bernoff makes a fascinating comparison between the public's appetite for buying CDs over the internet, and its lack of appetite for DRM songs. Online individuals (rather than households) bought 1.7 CDs over the internet per quarter.

"The comparatively modest iTunes numbers suggest that consumers are still spending the bulk of their music budget $14-at-a-time on shiny discs," he writes.

"iTunes sales are not cutting into CD sales," he elaborated to us, "they're an incremental purchase at best.

"There's a problem here. CD sales have fallen 20 per cent over 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."

It may be slightly premature to declare the DRM-era dead. But the signs are that it may be entering its final days.

Forrester and Nielsen's figures merely confirm that what the industry is losing in falling CD sales, it isn't gaining in DRM downloads.

Forrester Bernoff's attributes some blame on the technological restrictions - iTunes' DRM songs only play on Apple's iPod player.

At the In The City music convention held in Manchester in October, Columbia UK boss Mike Smith predicted music would be DRM-free within 12 months. Sony BMG UK, which owns Columbia, has declined to elaborate on the comments - which were not widely reported at the time. Perhaps more significantly, recent personnel changes at Universal Music, the 800lb gorilla, also suggest a more pragmatic strategy.

So if not DRM, then what?

In the UK, the major labels, represented by the British Phonographic Institute (BPI), have joined discussions on a blanket license for digital downloads in the UK. Discussions are taking place under the Chatham House rule. Although much of the infrastructure for a blanket license has yet to fall into place - the counting mechanisms and collection agencies have yet to be agreed upon - the UK makes a potentially promising experiment for a digital music blanket model.

UK consumers can take up free broadband offers from Sky and Orange, among others. This potentially removes one of the key objections to a flat fee - the fact that it's a compulsory payment for broadband users. It's increasingly feasible that a blanket license would be absorbed by UK consumers at little or no extra charge - simply becoming part of a competitive monthly tariff, only allowing the consumer to share music freely, and not be sued for copyright violations.

And while Andrew Gowers, whose Treasury report on intellectual property was published last week, passed on giving the blanket license moves his specific endorsement - he said it was too early to judge - he certainly helped the cause in one important way. Gowers advocated the establishment of a database of copyright material. Such a database is essential to managing how the pot of money raised through a blanket license is eventually distributed.

Two years ago blanket license advocate Jim Griffin predicted that 99 cents per song was "both too high and too low".

"It's too low to pay for the burden of a developing artist, and it's too high to fill an iPod," he predicted; while the approach wouldn't catch on with the public, it would cause significant harm to the industry.

It's significant that so many music stakeholders are now discussing Jim's long-favoured approach - a bundle - rather than placing any more faith in a route that relies on technological counter-measures.

Peter Jenner, Billy Bragg's manager, recently reflected here on business models that would arise after a blanket license. It's well worth a read. ®