When A Dollar Beats Free: Lessons From The iTunes Music Store

by Chris Seibold Jul 18, 2005

Presumably Amy Greer is felling rather giddy. For doing nothing more than, likely, randomly purchasing the 500,000,0000th song from the iTunes store she received a load of swag and the number of iPods she personally owns will soon more than double Hadley Stern’s* collection. To be more precise for coughing up .99 cents Amy Greer is now entitled to 10 iPods, a 10,000 song gift card, four tickets to a Coldplay concert (front row!) with backstage passes. Which isn’t quite as nice as scoring a wildly profitable English candy factory complete with an uncomplaining live-in labor force but not a bad trade for one penny less than a buck.

As interesting as Amy’s experience undoubtedly was what is more interesting for Apple fans is the astounding growth of the iTunes music store. Rolled out amid a cacophony of peer to peer file sharing programs the iTunes store has done what many thought highly improbable: enticed users into paying for something that previously they were getting for free. This is a particularly surprising development or most die-hard Mac enthusiasts. After all the relative cost of Macs to PCs is the most oft cited reason for Windows monopolistic dominance. Many Mac users will argue vociferously that if Macs were either priced like PC’s or promoted via seemingly low prices then surely the balance would be a bit more equitable.

The comparison is not entirely fair. Computer operating systems are an example of a natural monopoly so there is an argument that once IBM entered the fray that there is precious little Apple could do to staunch the bleeding. Yet there are still things to be learned from the runaway success of iTunes. To fully comprehend the lessons it is necessary to examine what allows iTunes to thrive in the midst of P2P file sharing programs. It would be the purest moment of hubris to suppose that the iTunes store is more popular or transfers a greater amount of data than the combination of the various file sharing programs so any information gleaned will probably not translate into overall market dominance. Still it will provide an interesting primer on how to succeed in spite of low-ball competition.

Why iTunes Succeeds:

Legal considerations: A lot of people just aren’t comfortable downloading music from someone else’s computer. They know that the artist probably nets next to nothing out of an iTunes download but they are positive that the artist receives exactly squat from a download. These folks are also compelled by their conscience to try to stay within the law. While Metallica and the RIAA might think launching lawsuits is the way to force people to stay legal the truth is that those actions have a negligible impact on behavior. In the end people wanting to do the right thing turn to iTunes because it is completely legal.

Convenience: While Kazaa (to use one example) may be cheap it is not the most convenient way to get music. You are left dealing with uncertain transfers, files of questionable quality, and host of other problems. With iTunes users are assured of fast servers, decent sounding files and a definite “what you click is what you get” shopping environment.

Music Previews:  You wouldn’t think a thirty-second preview would really be a big deal but when you’re paying for a song you have never heard it can be huge. Say, for example, a friend recommends We Built This City by Starship. During the thirty-second preview (and admittedly in this case you won’t need the entire thirty seconds) you can decide not to buy the song and remove your “friend” from your mental list of trusted music sources.

Low price of entry: With iTunes the first hit isn’t free but it is only .99 cents. That is not a big enough barrier to stop many people from giving iTunes a try.

Integration with hardware:  iTunes integrates so seamlessly with your computer and your iPod that the process is nearly transparent. This marriage of hardware and software is an example of great Apple engineering and what keeps rival music stores marginalized.

Unobtrusive DRM: People despise DRM (digital rights management). There is substance to this complaint: as a consumer you feel you are buying a song (despite the EULA) and once you exchange your money for goods you rightly expect to own the goods and be able to use them in any fashion you see fit. The iTunes store clearly shows that most people will live with a DRM system as long as it is not intrusive.

So what lessons can Apple take from the thrill ride of constant sales increases of the iTunes store and apply to the Macintosh? In many ways the iTunes store is already a reflection of things that are great about the Mac. The tight hardware software integration has been present on the Macintosh for some time. There is no DRM scheme on retail copies of Tiger (though iLife ‘05 employs a serial number). Where the Mac fails when compared to the iTunes store is obviously the cost of entry. The cheapest Mac Apple sells is the $499 Mac Mini. While the Mini is a perfectly capable computer $499 is, well, $498 more than the cost of trying iTunes. Coupled with the fact that there is no ready method to take a thirty-second (or thirty-day) preview of OS X most consumers are left with much more uncertainty when considering a jump to Macs. Perhaps with the upcoming switch to Intel chips the preview could be addressed but, for the foreseeable future, the cost of entry will still be much too high for someone to just “give Macs a shot.”

In the end the lesson of the iTunes store is both comforting and tough for Apple fans. The iTunes store coupled with the iPod proves Apple is still capable of catching the attention of a huge segment of America but it also seems to say that the Apple is, for more reasons than outlined above, unable to position the Mac in such a way as to recreate that success. At this point it is easy to say that as long as the Mac remains just a computer there is no imminent “revolution.” Still there is hope. If Apple learns the lessons of the iTunes music store, the iPod and offers repackaged Mac as a media center one certainly wonders if folks at Cupertino couldn’t draw on the lessons of their success and catch lightning in a bottle yet again. Sure the Mac will still languish in when the market share numbers are released for computers but you can be certain Apple wouldn’t mind selling the lion’s share of computers called “Media Centers.”

*Hadley owns a seemingly absurd five iPods. Two wildly customized models are likely on order from the Apple Store so he can have an iPod for each day of the week.


  • you b*stard.  I’ve got starship going round my head now.

    xbaz had this to say on Jul 19, 2005 Posts: 11
  • you b*stard.  I’ve got starship going round my head now.

    Truly, this is my finest moment. Actually I feel a little bad, maybe this will help.

    Chris Seibold had this to say on Jul 19, 2005 Posts: 354
  • Lost a point:
    - most people either have tin ears or could not care less about quality so they do not feel insulted by the mere idea of paying ¢99 for compressed music.

    Nevertheless, there is quite a number of CDs & SACDs I purchased thanks to the high quality iTMS preview. Something amazon needs to work on, their previews are almost worthless.

    Bad Beaver had this to say on Jul 19, 2005 Posts: 371
  • You might as well think of the Apple/ITMS company as seperate from the Apple/OSX company.  It would be like saying, “Adobe Photoshop has managed to successfully corner the graphics editing market.  I wonder why Apple hasn’t been able to do the same with OSX.”

    While they come from the same maker, ITMS/Ipod and the Mac may are night and day.  Positioning one for dominance is an entirely different set of challenges than the other.

    The key is that ITMS/Ipod do not depend on the Mac platform.  In fact, it’s arguable that Apple could have targeted solely the PC market and met with almost as much success as they have by targeting both.

    Beeblebrox had this to say on Jul 19, 2005 Posts: 2220
  • Btw, I buy my songs from Allofmp3.com.  It’s legal and a fraction of the cost of ITMS.  There is no DRM and you get to choose the compression rate.  Plus, you can preview the ENTIRE song, not just 30 seconds, for free.  While it doesn’t have quite the selection of ITMS, in all other ways it’s everything a music store should be.

    Beeblebrox had this to say on Jul 19, 2005 Posts: 2220
  • To Beeblebrox.

    I don’t understand why you would give some Russians your money for files that aren’t legal in the US or probably nearly anywhere outside of Russia. It makes no sense to me.

    You might as well just use an MP3 download service for free. The money collected by allofmp3.com does not go to the artists. Not one penny goes to anyone other than to the Russian operators of the website.

    The files aren’t legal. The artists aren’t getting paid. It is almost certainly just as illegal as using Grokster. So what is the point of spending money?

    James Bailey had this to say on Jul 19, 2005 Posts: 7
  • Actually it IS legal.  The RIAA might not like it, but contrary to popular belief, that doesn’t automatically make it illegal.

    And I pay for it for the exact reasons people pay for ITMS.  Convenience.  Music previews.  Low price.  Unobtrusive DRM (in this case, no DRM at all).  And it’s legal.

    And please spare me the “artists” bleeding heart nonsense.  First of all, people don’t buy songs from ITMS because they want to support the artists.  If that were true, they wouldn’t have downloaded from Kazaa at all.  Second of all, I doubt any of them know or even care what percentage of their ITMS or CD purchase actually goes to the artists. 

    And third, it’s not true that “not one penny goes to anyone other than to Russian operators of the website.”  Aside from having to purchase the CD in the first place, Allofmp3 licenses the music from the Russian equivalent of the RIAA.  It’s that group’s responsibility to pass on royalties to the artists.  And whether or not they do that has no bearing on my purchases just as the RIAA and music labels’ questionable accounting and bilking of artists out of royalties has no bearing on people buying CDs or downloading from ITMS.

    If YOU cared so much about the artists, then instead of pulling RIAA talking points out of your butt, you’d be better off advocating the dismantling of the RIAA altogether or boycotting ITMS and CD retailers until the labels treat artists more fairly and give them the royalties and percentages they owe them.  Or you’d advocate Apple exercising some of its market muscle to negotiate a greater percentage of the revenue of its downloads going to the artists.

    Beeblebrox had this to say on Jul 19, 2005 Posts: 2220
  • “Nevertheless, there is quite a number of CDs & SACDs I purchased thanks to the high quality iTMS preview. Something amazon needs to work on, their previews are almost worthless.”

    So true.  Back in the Napster days I would download stuff just to try it out and then BUY THE CD!  (SERIOUSLY!)  I love that there is finally an easy to use and fairly comprehensive library of music to check out, even if it is Starship.  It’s certainly solved quite a few “Who did that song?” debates.

    dickrichards2000 had this to say on Jul 22, 2005 Posts: 112
  • If that were true, they wouldn’t have downloaded from Kazaa at all.

    You’re conclusion doesn’t necessarily follow from your assertion. People used P2P services because, before iTMS, there was no easy legal way to download music tracks off the internet. The success of iTMS shows that the majority of people prefer to get their music legally, and that they wish the artists to get compensation.

    boycotting ITMS and CD retailers until the labels treat artists more fairly

    So what you’re basically saying is, “The RIAA doesn’t pay artists enough, so I’m going to use a Russian service that doesn’t pay the atists anything”.  Nice rationalization.

    Aside from having to purchase the CD in the first place, Allofmp3 licenses the music from the Russian equivalent of the RIAA.

    American artists don’t belong to the “Russian equivalent of the RIAA.” The RIAA is an industry association which an artist joins in order to aid the collection of royalties. I seriously doubt U.S. artists belong to some obscure Russion artist association—therefore, they get squat from it.

    So basically what it boils down to is that this site buys ONE copy of the CD and then re-sells it hundreds of times… and the artists might be compensated for the one copy (assuming it’s a valid legal copy pressed by the record company - which isn’t a given in the Russian markets).

    <sarcasm>Yeah, that’s fair.</sarcasm>

    vb_baysider had this to say on Jul 27, 2005 Posts: 243
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