Apple/Analysts on the iTunes Music Store, iPod

Hell may have frozen over, as Apple’s Web site says, but the battle for supremacy in the digital music distribution market is just heating up. With the release of iTunes Music Store for Windows, Apple is confident that they have the solution to beat the competition. With the help of the iPod digital music player, analysts agree that Apple has an edge.

Windows users have been able to buy an iPod for some time now, but using the iPod with a Windows-based personal computer wasn’t as easy as it is on a Macintosh. Apple partnered with MusicMatch for a while, making it the standard for Windows users, but it still didn’t match the Mac experience. With the release of iTunes for Windows, users of both platforms can have the exact same experience, but more importantly, both now have access to the iTunes Music Store.

“Apple has done a terrific job delivering a consistent iTunes experience on Windows as the Mac,” Senior Jupiter analyst Joe Wilcox told MacCentral. “Both clients access the same store and library of music. Extras, like allowance credits for the kids or the celebrity playlists, help differentiate the iTunes Music Store from competing Windows Services.”

Apple reported at their launch event that over 13 million songs have been sold on the iTunes Music Store so far — and that’s without 95 percent of the market being able to access the music. Now that the biggest segment of personal computer users can access and purchase music, Apple has high hopes for the number of songs that will be sold this year.

“We have set a new goal for ourselves, which is 100 million songs downloaded in a year,” Rob Schoeben — Apple vice president of Application Product Marketing, told MacCentral. “That sounds good, but let me be clear — that’s not 100 million songs from today, that’s 100 million from when we first launched in April.”

Schoeben points to exclusive deals that Apple has with artists that no other service can offer. For example, the iTunes Music Store is the only place to buy The Grateful Dead online and if you want the Eagles new CD, you’ll have to buy it from Apple or wait until next week to pick it up in stores.

With the release of the second generation music store, Apple introduced a new Allowance feature that lets parents set spending limits for their kids — an alternative to piracy, according to Apple.

“We’ve had a lot of feedback from parents about weaning their kids off of illegal file sharing, said Schoeben. “There are a lot of responsible parents out there that love the fact their kids are exploring music, but they don’t like the fact that they’re doing it via illegal file sharing.”

AOL and Pepsi

Apple announced a partnership with America Online to provide its users with one-click access to the iTunes Music Store. The service, which will debut later this quarter, will give more than 25 million AOL users access to the iTunes Music Store, according to the companies.

The access will happen through AOL’s own AOL Music site, where users will be able to preview and buy music through the iTunes Music Store. Apple will also offer selections of original AOL content like Sessions@AOL and BroadBAND Rocks! through the iTunes Music Store.

Schoeben said that when the music store launches later this quarter, you will have a choice of log-ins: your AOL screen name or your Apple ID. You can buy music using either one.

Apple is also working with Pepsi to give away 100 million free songs to Mac and Windows users of the iTunes Music Store. The promotion kicks off on February 1, 2004, when Pepsi will begin distributing 100 million winning codes in the caps of its 20 ounce and 1 liter bottles of Pepsi, Diet Pepsi and Sierra Mist soft drinks. The winning codes are redeemable for a free song from the iTunes Music Store — winners go to the store and enter the code found under the cap, and take their pick of any $0.99 song from Apple’s collection.

“The AOL and Pepsi deals are brilliant marketing moves that will help expose the iTunes Music Store to new people,” said Jupiter’s Wilcox.

Competition heats up

While Apple may be the current market share leader for purchased downloadable music and the portable digital music player, there are plenty of companies that are ready to challenge them. BuyMusic.com, MusicMatch, Dell, and the most recognized name in file sharing, Napster, are all ready to take on Apple.

“There’s been a lot of excitement about the concept of digital music distribution — we love that,” said Apple’s Schoeben. “Let’s put the spotlight on the experience of getting your music online instead of from a CD — when that spotlight is on, we are very happy to compete in the open market because we have the best solution. So, bring it on.”

Analysts think Apple has an edge that will be difficult for the other services to overcome: the iPod.

“Apple particularly stands to benefit [from online music distribution] because the iPod is considered a pioneer in the high-capacity MP3 player market,” said Tim Deal, an analyst with Technology Business Research. “Now, with partnerships with AOL and Pepsi, Apple’s iTunes will develop extraordinary mind share among consumers. In effect, this is like a trail of breadcrumbs leading consumers to the Mac platform.”

Apple couldn’t provide a breakdown on the number of iPods sold to Windows users because the SKUs have recently been combined. The last time the information was available — before the third generation iPod — Apple’s Senior Director of Hardware Product Marketing Greg Joswiak, said it was about a 50/50 split between the Mac and Windows users.

“I think this is an important step for Apple,” said Deal. “While the profitability of the iTunes store right now is questionable, the popularity of the iPod is not. Sales of the iPod generated $121 million in revenue, up 9 percent from the prior quarter and 128 percent from a year ago. The dramatic increase of sales of the iPod is worth taking note of.”

Deal explained that the iPod is priced around the same as a Gateway value PC. Apple iPod sales last quarter have more than doubled from the year-ago-quarter from 140,000 shipments to 336,000 shipments in fourth quarter. iPod revenues represented 7 percent of the company’s total revenue for the quarter — as a comparison, the iBook pulled in $154 million for the quarter and accounted for 9 percent of the company’s total revenue.

One factor that will help Napster in the market is brand recognition — although Roxio will have to do some work to change the way consumers think about the Napster name. But Apple has very strong brand recognition among consumers, consistently finishing among the top companies in surveys.

Wilcox believes that with both companies having a strong brand, it will be extras, like Pepsi and AOL that may ultimately help Apple. “Roxio is betting big on Napster’s brand recognition. But, Apple also commands good brand recognition. The Pepsi promotion can only help, in terms of bolstering Apple’s brand and bringing new people to the iTunes Music Store.”

Does iTunes help or hurt the potential switchers?

Through its marketing campaigns, well publicized company events, Macworld Expos and other advertising initiatives, Apple has been getting the word out to consumers about the Macintosh platform. Messages come from everyday users that solved problems with their Mac that they couldn’t do on a Windows-based PC and from several celebrities that do movies and other tasks on the Mac.

Does releasing iTunes for Windows go against Apple’s own marketing campaign of getting Windows users to switch to a Mac? Of course, there is more to a Mac than just buying and downloading music, so there is still incentive enough to draw the switchers, but Apple has another way of looking at the iPod and iTunes Music Store.

Schoeben explained that in this situation the iPod is the hardware platform and the personal computer is the peripheral you need to connect it. Apple isn’t as concerned with the platform users choose as they are with making the experience on the iTunes Music Store a good one for their customers.

“In its infancy, Apple’s music strategy was really more about converting Windows users to the Mac,” said Jupiter analyst, Joe Wilcox. “But the success of iPod and the iTunes Music Store has made Mac conversion much less important. Music represents an important new line of business for Apple — the volumes that could make or break the business are on Windows. That’s not to say music is no longer a good way to win converts. On the contrary, the more popular the iPod and music store are, the more Windows users that will be exposed to Apple products. The more people that have good experiences with Apple music products, the more that could eventually switch to the Mac.”

Waiting game

With the Windows iTunes software out the door, Apple will have to watch and see if users respond and start to purchase music. For its part, Apple is confident in the product they have developed and believe consumers from both platforms will use the service.

“It’s the world’s best jukebox and arguably the world’s best piece of Windows software ever written,” said Apple’s Schoeben.

The success of the iPod certainly gives Apple an edge in the market, not to mention the huge deals with Pepsi and AOL, which will give millions of people the opportunity to experience Apple products.

“We have an unbeatable combination,” said Schoeben. “We are the market leader and we intend to stay that way.”