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January 4, 2014

An aging Apple?

Filed under: Apple,Uncategorized,Wireless Industry — Peter Arnold

According to a new report from Nielsen SoundScan, for the first time since 2003, when the iTunes store opened, annual U.S. digital music sales have declined. Digital track sales fell from 1.34 billion units in 2012 to 1.26 billion in 2013, a decline of about six percent.  Digital album sales fell 0.1% while CD sales went into free fall – down nearly 15% last year.

The driving force behind these numbers appears to be the growth of streaming music sites which suggests that creative destruction in the music industry is alive and well.

But that aside, the more interesting tech parlor game is how this change will affect Apple.  After all, no other company has used the music industry’s current business model more effectively and more profitably.  Apple has married innovative hardware and elegant software into first-class (read: expensive, high-margin) products.

This strategy worked because everyone needed personal hardware (iPods, iPhones, Macs) to access entertainment.  The “cloud” was not a viable mass-market option for most of the past decade and Steve Jobs many times dismissed the concept of streaming music services.

But with Spotify, Pandora, Vevo (the web’s #3 video publisher behind YouTube and Facebook) and others offering attractive services to fit changing demands, the concept of buying single songs no longer has the same allure.  Yes, Apple Radio is a good entrant but it was woefully late.

In the past, Apple cannibalized sales in order to create new products.  The iPhone did that with the iPod.  But Apple back then was a different company.  Its near-death experience in 1997 was still recent history when the company began work on the iPhone in 2004, despite protests from the iPod division.

With the music industry seeing the impact of cloud-based services, Apple’s model no longer looks as imposing.  Moreover, a $487 billion company (Apple today) doesn’t necessarily act with the quickness of a $2.3 billion company (Apple in 1997).

The song will not remain the same.  Stay tuned.

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