For admirers of fine crystal, there is something magical about the name Swarovski. For admires of speed and glamour there is something magical about the name Ferrari or Lamborghini. And, without a shadow of doubt, for the lovers of high technology, innovation and music there is something magical about the name Apple.
While ages ago our ancestors were bothered by the question of who came first a chicken or an egg, today the question is different. As the fame and success of Apple company and its products is increasing, the question one may rise is for example: what came first … the iPod or iTunes? In my paper I would like to present the financial report of the iTunes. To begin with I would like to give some background history of the product because even though the product itself is familiar to everyone, some may still wonder of its origin and principle function.
As a matter of fact iTunes came first, even though it seems that we started hearing about the iPods much earlier. Before the iPod was released, Mac users had had the ‘iLife’ on their computers. The Ilife also included iTunes version 1.0 – however it looked rather different from the “modern” iPods or itunes. The main difference was that the iLife has a three-note icon and not the double green one which people are familiar with today. So, as we can see, the iTunes was around, for for the Mac only, of course, from January 2001. In April of 2003, a new version of iTunes (4.0) was released. That same year the iTunes Store – where you could legally buy and download music was officially launched. However, at that time the store was for the customers within the United States only, the rest of the world still had to wait. At last, in October 2003 the iTunes version 4.1 came along and for the first time it was availabe for Windows based computers as well. The year 2004 was marked by the opening of iTunes Music Store in England. In the next years, other European countries followed, but it was a constant topic of complaint that the prices in the U.K. were much higher than all over Europe.
And now I would like to deal more closely with the financial information that is available on Itunes. Even though Itunes came to this world in 2001, it reached its peak popularity in 2003. By April 2003, iTunes Music Store had sold more than 350 million songs. It was forecasted that if Apple continued selling songs at this rate of growth, it was on its way to passing the billion-song mark before the end of 2005. Later in the report we will be able to see if these predictions was correct. In the year 2003 the growth looked exponential, though being linear, however the competition persisted(Smith).
As for the year 2004 it was revealed by the Apple authorities that the compnay had sold 50 million songs through its iTunes Music Store, with about 2.5 million songs being downloaded each week. Moreover, the Apple authorities said the sales figures excluded the number of songs downloaded through a promotion with Pepsi. Under that promotion, 100 million songs were being given away. Not being satisfied with such a success, Apple CEO Steve Jobs announced a goal of distributing 100 million songs by April, 2004. In December 2004 it was stated that the iTunes users were downloading 2.5 million songs per week. Such a number meant that Apple was selling songs at a rate of 130 million per year. Still the Apple authorieries couldn not afford simply looking at the great results because the rapid competition persisted. The main competitors the compnay was facing were stores such as Roxio’s Napster and MusicMatch, Microsoft and Virgin (Fried).
In 2005 the success was unbelievable. Apple claimed a 70 per cent market share «for singles and albums», based on its own official calculations. That year customers were buying 2.7 million songs per week from the store. Having a tendency to make forecasts and set goals, Apple announced that if they maintained the same level of sales, it would sell 140 million songs next year (Smith). Among the good news of that year it must be mentioned that, Apple had tightened its DRM policy. It chose to cut the number of times a playlist can be burned to CD from ten to seven. But the compensation for this was that Apple came up with another innovation – the downloaded music from then on could be shared among five computers rather than three (Smith). By the summer of 2005 iTunes official Stores were available in 19 countries: US, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the UK.
At the beginning of 2006 it was clear that the users of Apple’s iTunes player passed QuickTime in mid-2005, and at current growth rates iTunes should pass RealPlayer by mid-2006. The Apple’s iTunes had entered the media arena not that long ago, however it had been climbing the charts in 2006 much faster than its more experienced competitors (Bandwidth). However, the situation with iTunes in 2006 was unusual indeed. From one point, according to the statistical data, since January 2006, the number of monthly iTunes transactions “has declined by 58 percent, while the average size per purchase declined by 17 percent, leading to a 65-percent overall drop in monthly iTunes revenue” (Fox). It was a shocking decline after a period of strong growth.
As a matter of fact it was not at all only Apple’s problem. According to Andrew Orlowski in his article “iTunes sales ‘collapsing’”, “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” (Orlowski).
But, as surprising as it is, the iTunes spokesman Tom Neumayr said that all the reports stating that the company was bearing great losses were incorrect. Under those circumstances Forrester had to study the iTunes debit and credit purchases. Having studied the reports it was discovered that possibly the decline was just seasonal, still there was a chance that the demand for digital music was dropping. To prove that the company was doing fine, Apple proclaimed really high share growth as well as high profits that year. Still, the contradiction was left unsold. So, it may be considered that as the iTunes numbers Apple entered the year 2007 with were rather good, the sales drops, if such existed, did not hurt the company (Fox).
It 2007 the marketors came to the conclusion that the iTunes could be about a $2-billion business. At the last available reading in February 2006, iTunes had been “1032 days old, giving an average download rate of 969074 songs per day. By a simplistic logarithmic calculation, the number of downloads has doubled approximately 29 times, or about once every 34 days.” In Januray 2007, Steve Jobs’s, Apple’s CEO, proclaimed the year 2007 to be the most exciting year for the company and the consumers. As for now, being only half a way through the year, Steve Jobs’s predictions seem to come true. Though, there is again a contradiction suggesting that Apple products’ sales number are falling or are supposed to fall in the near future.
The year 2007 was also marked by one more occurrence. The Apple Corporation was called to “open” the digital rights management (DRM). It should be explained that the DRM is a system that must be used to protect the company’s music from theft. This program would also ensure that the music purchased from iTunes could be played on digital devices purchased from other companies, and protected music purchased from other online music stores can play on iPods and iTunes. The public considered this step necessary to make for Apple because of its stunning global success of iPod music player and iTunes online music store. Because, obviously, the more the product consumption rises the more theft may be expected. As for now, the company chose to examine the current situation and look at the possible alternatives for the future.
It may seem that the financial situation of the Apple products, particularly iTunes, is rather unstable, still having high revenues. It may be true, but what must be remembered is that despite the growth the online music market has seen over the past couple of years, it still only a small fraction of overall music sales. Moreover, the whole music and media market was experiencing hardships over the last couple of years. The sales of physical media were rapidly declining even as digital sales were going upward (Bangeman).
And, what cannot be denied is that the online music business is still very young. That means that such processes as unstableness, sales decrease, and, of course, high revenues, must persist at some point and there is no way for them not to. The online music industry is in its elementary school years right now and all the risky processes will probably vanish completely by the time the industry reaches its junior-high school years. As for now the rise of iTunes was steady, however it should be expected that the Growth patterns may not look identical from quarter to quarter or year to year. Especially as we see that the market does grow. When looking at the decreased sales numbers of iTunes, one should also remember that even though the CDs may be considered old school, they are still the preferred format for the majority of music-listeners. And that is not expected to change any time soon, no mater what kinds of high technology devices appear.
In conclusion I would like to say that Apple has long ago earned the reputation of a high class innovator that is always ready to surprise the public with a completely new device that was impossible to imagine before. Also, as simple psychology informs us people love winners. And this is what can be considered one of the strongest competitive advantages of Apple. Apple has been, and hopefully will continue, at least for the close future, to be a winner. On the other hand, the sky is not falling for Apple or for the any other online music company. Today online music stores are going through a period of particular challenges right now, as they attempt to increase sales. Nevertheless, taking into consideration the speed the world is developing with right now, the period of challenges will pass, being replaced by the era of welfare.