Is iTunes Dying?

Forrester Group recently presented the results of a 3 months study about digital music sells on Apple’s iTunes, and the conclusions don’t look that good for the Cupertino-based company.

According to the cited statistics, since January this year the number of iTunes transactions made each month has slumped 58 percent, while the average size per purchase has registered a downfall of 17 percent, leading to a 65-percent overall drop in monthly iTunes revenue, U.S. market research group Forrester said in a survey among North American consumers.

Despite the numbers, “it is too soon to tell if this decline was seasonal or if buyers were reaching their saturation level for digital music,” Forrester said in the report that was published to its clients last week, and made available to Reuters on Wednesday.

Apple’s music download service is now dominating the market, following the massive success of the tiny iPod. Apple declared that over 1.5 billion music tracks and tens of millions of TV shows and movies were sold through iTunes since its launch.

The decline indicated by the Forrester analysis comes after a period of strong growth. The number of monthly iTunes transactions grew sevenfold, from just over two transactions per 1,000 households in April 2004, to nearly 17 during January 2006. Over that period, the average transaction size almost doubled, to $6.69 from $3.55.

Revenues generated by iTunes are dominated by a large number of small transactions, with Apple selling just 20 iTunes tracks for every iPod shipped.

Forrester's recent analysis of more than 2,700 US iTunes debit and credit card transactions reveals that 3% of online households made an iTunes purchase in the past year. Apple's iTunes proves that $0.99 micropayments for digital music can lead to substantial revenue; buyers spent an average of $35 at iTunes over the past year.

With half of all transactions costing $3 or less, though, transaction fees threaten to make iTunes unprofitable. Since the introduction of the iTunes Music Store, Apple has been steadily selling just 20 iTunes tracks for each iPod sold, suggesting that even at $0.99, most consumers still aren't sold on the value of digital music.

"Only Apple knows just how much profit there is at the end of the day on a $1.98 credit card transaction for two songs, but with transaction costs, hosting costs, and the wholesale price of the songs, there's not much margin left," Forrester said.

Of all online homes, only 3 percent buy music at Apple's music store, and of those most continue to buy most of their music on compact discs (CDs).

"Although Apple is the dominant leader in the digital music industry, the entire category of digital music made up just 4 percent of U.S. music sales in 2005," Forrester said.

On the other hand, Apple denies any problems with its service, with spokeswoman Natalie Kerris saying that the figure, from research firm Forrester, “is simply incorrect”; sales are up 75 per cent on 2005 and Apple, with six per cent of the market, is now the country's fourth largest music retailer. However, Apple did not disclose any specific details about how much profit iTunes generates.

Other analysts claim that the numbers delivered by Forrester and the overall conclusion that iTunes is dying are wrong.

A Pacific Crest Securities analyst, Steve Lidberg, says that considering the low impact iTunes has on Apple’s overall revenues, even a drop in sales would be insignificant: “noise regarding [an] iTunes slowdown is misleading.”

Sanford Bernstein analyst Toni Sacconaghi expects the overall music player market to slow to 22% growth in 2008 from 48% in 2006. “Although the iPod’s market share has been resilient so far, history provides several examples of leading products that lost share despite seemingly strong competitive advantages,” he wrote.

“For example, Sony’s Walkman - the iPod of its day - saw its share decline from 100% to 28% in three years as other large electronics makers entered the portable music market. As another example, in the video game console market, Microsoft’s first-generation Xbox took 20% share largely from market share leader Sony’s Playstation.”

iTunes and the iPod are now facing Microsoft’s new rivals, Zune and Zune Marketplace. Zune MP3 player is also touted as the “iPod-killer”, and according to market research it debuted as No. 2 music gadget in November, after the iPod. Microsoft hopes to sell 1 million Zunes by the end of June, 2007.--playfuls.com