An aging Apple?

Filed under: Apple,Wireless Industry

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.

May the farce be with you

RAMESES IIWall Street Journal reporter Jeffrey Trachtenberg’s article this week on e-book pricing is a depressing reminder that Karl Marx was right: History does repeat itself, first as tragedy and then as farce.  Trachtenberg’s focus is on the inflated pricing structure creeping into e-book pricing but if you change the topic from books to music, his article could probably have appeared in 1998.

To put this in perspective, here’s a thought worth at least passing consideration: How did the music industry, with all its entrenched legal and financial heft among the major labels during the 1980s and 1990s, manage to be dominated by a computer company?  Call it arrogance in the sense that the guiding philosophy for too long involved a refusal to give consumers what they were clamoring for.  Meanwhile, the only pro-active strategy seemed to be launching lawsuits against tweens and grannies.

Remember Liquid Audio?  No?  OK, here goes: It started in the mid-1990s as a music download service and had the potential to succeed, driving home broadband adoption in the process.  Reportedly Steve Jobs nosed around the company early on, considering purchasing it as a way to jumpstart Apple’s nascent moves into the music industry.

But Liquid Audio never caught on because (gee, this is shocking) it could never secure sufficient licensing agreements with the music labels.  Meanwhile, even as two-hour movies on DVD were selling everywhere for $14, the music industry kept insisting that this same price was reasonable for a 45-minute audio disc with perhaps eight songs – in other words, the same product as Elvis Presley’s 1956 Christmas Album albeit in a more technologically sophisticated format.

Back to e-Books.  With the music industry’s pricing arrogance serving as a case study in how to anger consumers, the publishing conglomerate has a serious need for entry level marketing help.  This story has been told before and the ending is inevitable:

Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away

R.I.P., Steve

Steve JobsDuring the coming days, there will be testimonials to Steve Jobs that border on hagiography. (Erica Ogg at GigaOm is already out with a good one.) He might not have changed “the world” but he certainly did change large parts of it. More than anyone else, Jobs convinced the music industry to stop the circular firing squad mentality that resulted in the perverse concept of engaging the next generation of buyers by suing or threatening to sue them.

But twenty years earlier, he also foresaw the role of the graphic interface in personal computing while most of the industry was fixated on hardware. Think back to 1980: IBM not only rebuffed Bill Gates’ proposal to sell the concept behind Windows’ forerunner, it told Gates that its OS/1 would push Microsoft out of business. That was the climate into which Jobs pushed Apple barely a few years later.

This author remembers it well. In 1984, I purchased my first computer. It was a 128 kb Mac preloaded with basic software (anyone remember MacWrite?) that Dartmouth made available for about $1,000. The word processing was definitely preferable to typing on a Smith-Corona but had its limitations. The maximum size of a text document was about 6-7 pages which meant that my senior thesis on Jean-Paul Sartre and European totalitarianism actually comprised three separate documents.

Apple would founder without Jobs. It suffered terribly under Gil Amelio, whose lack of foresight can be summed up by his brusque dismissal of the Internet in his biography, On the Firing Line.

Finally, it’s worth noting that in addition to the iPod, iPhone, Mac and everything else, Jobs had a hand in the greatest commercial in TV history. According to Apple lore, the Board was appalled when Jobs previewed the commercial in late 1983 but Jobs persisted. Nearly 30 years later, no other commercial has come close.

R.I.P, Steve Jobs.

Why Apple might want to do the Hulu

Filed under: Apple,IBM,Technology

Why would Steve Jobs be interested in Hulu? The answer may be in Tarheel Country, specifically Maiden, near I-77.

That’s where you’ll find Apple’s mammoth new data center, built to handle iCloud and a lot more.  How much more?  Look at some numbers: This center is either 500,000 square feet (AppleInsider) or a million (Robert Cringely). By comparison, according to Cringely, IBM’s Special Events Web Service, which handled data for the Olympics, has three data centers with a combined 2000 square feet.

Any way you calculate it, iCloud by itself will not generate the data needed to give Apple anything approaching a suitable return on capital.  But wait!  Isn’t Apple trying to fast track the consumer transition to the cloud by phasing out (or minimizing) internal hard drives?  The new Mac Mini, introduced this week, has no optical drive and neither does the Mac Air, which replaces Apple’s aging MacBook.  Meanwhile, you’ve never been able to play a blu-ray disc on your Mac.

But that’s still not nearly enough data to pay for the Maiden center, especially given Moore’s Law (“the number of transistors on a chip will double about every two years”).

Let’s go one step further and factor in compression.  Even aging microchips in the Apple line have an H.264 encoder/decoder that apparently can compress a 1080p audio/video stream into four megabits per second.  That compares with about 20 megabits in normal circumstances or perhaps 24 for better HDTV.

Here’s the short answer on Hulu: Apple has pumped a huge amount of money into North Carolina but its returns, even if iCloud takes off, will be paltry-to-negative.  Even if you forget the money (Apple is sitting on $76 billion, after all), the black eye for the company would be a huge embarrassment.

So Steve and his colleagues need to do something fast.  Buy Hulu and integrate it into iTunes.  It’s not a great solution but as Richard Dreyfus demanded from Roy Scheider in Jaws, “You got any better ideas, hot shot?”

Sir Paul: Still believing in yesterday

Filed under: Apple,Music Industry

BEATLESThere’s something remarkably ironic in today’s news that iTunes will begin selling Beatles songs.  Paul McCartney released a statement saying in part, “We’re really excited to bring the Beatles’ music to iTunes.  It’s fantastic to see the songs we originally released on vinyl receive as much love in the digital world as they did the first time around.”

The comment is risible for the leader of a band that for so many years defined the musical avant garde but now acts more like a quaint anachronism.  Itunes launched in January 2001 and earlier this year commemorated its 10 billionth music download. Yet only now are the songs that once defined rock’s leading edge available.  In short, it’s long past the time that legions of Beatles fans have grabbed Abbey Road or Magical Mystery Tour off Limewire.

That said, no one likes a curmudgeon so it’s worth a shout-out to the best aspect of today’s announcement, namely the availability of the 1964 Live at Washington Coliseum concert.  As Randy Lewis at the LA Times describes it, the concert was “never before released officially.” Loose translation: All you had to do before today was to fire up gnutella.

What 2010 Will Bring

As Yogi Berra once said, It’s hard to make predictions, especially about the future. A few predictions from the 2010 crystal ball:

Google’s pride goeth before its fall. Not content to be the big kahuna in technology, Google soon becomes a consumer products company with the Nexus One. Big mistake. This requires a totally different competency – oh yes, and means lower margins. Google has no experience in consumer marketing and brand loyalty is unproven at best. There’s a big difference between convincing ISPs or OEMs to default to your search engine and convincing millions of consumers to choose an unsubsidized phone.

Also, sales will lag without subsidies which further depresses margins. Remember that iPhone sales didn’t soar until AT&T’s subsidies brought the price below $200.

And speaking of Apple products….

Apple’s tablet will produce a migraine. Let’s assume that the iSlate is introduced in January and costs around $800 . The Mac Air isn’t much more expensive and probably does a lot more. Moreover, if you’re going to work on the LIRR or leaving on a business trip, you’re already carrying your laptop. So why carry another expensive gadget which becomes yet another thing to break, leave in the hotel room, or lose in the airport. Not to mention that the AppleCare will likely be another $250.

In this economy? Not gonna happen.

Clearwire’s troubles will mount. “You got real trouble comin’,” said Jackie Gleason in a memorable 1976 movie line and this will probably be Clearwire’s mantra in 2010. Even though the WiMax technology is decent, the idea that consumers on a mass market scale will opt for an unbundled service sufficient to cover capital outlays is fanciful. The company’s recent promo will not be enough to spark sufficient growth. Meanwhile, Google’s decision to turn off the investment spigot looks increasing prescient.

Verizon still doesn’t get an iPhone – unless it does. This is my Hail Mary. Conventional wisdom has it that Verizon gets a CDMA iPhone by 3Q10. I still doubt it. That’s when the company will be rolling out its 4G service. So why would Apple want to tie down its iPhone with a CDMA technology that Verizon itself will be calling outdated? Sure, Apple will sell a few million more iPhones but it’s still faced with the task of adapting 4G technology to the iPhone OS. Not a very appealing long-term strategy from a company that prides itself on always being at the cutting edge.

Odds are that I’ll be wrong on the last one. But as Eli Manning and David Tyree could tell you, sometimes it pays to throw long.

LA Confidential

(Las Vegas) The award for the year’s most puzzling headline goes to the Los Angeles Times for this doozy on David Sarno’s story about iPhone usage: “AT&T may penalize iPhone users who hog data.”

It’s a great headline, at least to the extent that “penalize” is a shorthand way of saying, “Those who consume a lot of a product should pay more than those who only use a little.” Actually, Sarno’s article is fairly straightforward and is one more example of how the current uniform data pricing structure among wireless carriers is increasingly untenable.

According to the head of AT&T’s wireless division, three percent of iPhone users are chewing up 40+ percent of the company’s bandwidth. Credit the proliferation of mobile video options. But this imbalance should hardly come as a surprise since a similar imbalance has existed on wired broadband for years.

Japan, which led the world in wired broadband, faced a similar issue well before America did. Thanks mostly to P2P, fewer than five percent of subscribers consumed almost half the country’s bandwidth. For a good resource on this, here’s the 2007 report on net neutrality from Japan’s Ministry of Internal Affairs and Communications.

Specifically, look at the usage charts on pages 17-19 and the conclusions on pages 59-66.

A Long & Winding Road

Filed under: Apple,Music Industry

(New York) Prior to Apple’s announcement yesterday about a revamped iPod line and new iTunes Store, speculation was rampant that the company would announce its long-awaited deal to put the Beatles on iTunes. ‘Twas not to be, alas. So nearly three years after Apple and Apple Corps Ltd. (the Beatles guardian) settled their long-running trademark suit, “Love Me Do” and “Eleanor Rigby” still aren’t available on the world’s most popular online music store.

For Apple Corps Ltd., this is a mistake on the order of General Howe sending his grenadiers up Breed’s Hill instead of sailing up the Mystic River. If the experience of the music industry during the last decade teaches anything, it’s that users can quickly get whatever songs they want. When the music industry makes it easy and legal (i.e., iTunes), they profit. When the industry digs in its heels, the loss of revenue is brutal as users flock to P2P and Limewire (or for old-fashioned types, there’s always passing around a CD).

That’s why Apple Corps Ltd will have only itself to blame as music revenues drop — with love, from me to you.

RealNetworks’ Humble Pie

(New York) John Paczkowski, who writes the “Digital Daily” blog at The Wall Street Journal has an interesting piece this morning about Apple and proposed RealNetworks app. According to Paczkowski:

RealNetworks has submitted to Apple a free application that will bring its $15-a-month Rhapsody subscription music service to anyone with an iPhone or iPod.. Apple [is] in a uniquely uncomfortable spot: Accept into the App Store an on-demand streaming music application that will compete [with] iTunes users or reject it and suffer. a nasty public relations nightmare.

The irony is downright amusing. RealNetworks rejected the underlying concept of the iPod back in 2000. That sent Tony Fadell, grandfather of the iPod’s technology, into Steve Jobs’ welcoming arms and the rest is history.

If Apple is smart, it will swallow its pride and approve this, which will eviscerate any PR problem. Meanwhile the roughly 500 people in the country who want to pay for Rhapsody on their iPhones will get it, while just about everyone else will be content with iTunes. Done deal.