Thursday, August 28, 2008

The Death of the Album, or the Hegemony of iTunes?

I wasn't sure what headline was more appropriate for a summary of the Wall Street Journal article at the link below. So this post is about 3 topics: the control iTunes' distribution gives it, digital merchandizing (aka "albums"), and whether iTunes actually harms music sales.

More Artists Steer Clear of iTunes
Apple's Online Music Store Sells Lots of Singles, But Labels Seek Higher Profits of Full Album Sales

First let's look at these snippets that address how iTunes' uses its distribution to get what it wants. Exclusives are as old as the music industry, but Apple's ability to dictate both the a la carte singles business and fixed low pricing is enviable as a distributor, but frightening as an album merchandizer.

"iTunes, with few exceptions, requires that songs be made available separately."

"Apple isn't willing to sell songs for more than 99 cents."

"[Apple] often asks for exclusive sales rights for songs in exchange for prominent placement on its home page."

"Apple has said it makes little profit from iTunes because of the costs of running the online store."

That last point is important! Apple iself admits (or claims) that it only breaks even on the thin margin business labels' impose on the download business. Apple makes money on its player hardware business, not the music. But its insistence on the 99 cent retail price point defines the market for any other competitor. This keeps Apple's competitors out of the market, further harming the labels' strategic business of distributor diversification.

Next let's look at some of the very intersting data from the article on how the album as merchandizing is faring.

Merchandizing online has always been more difficult than in the physical world. In the real world, we can walk down aisles packed with goods and quickly filter what we want visually, but sometimes find new stuff by mere serendipity, or by seeing distant end-caps or hangers. Shopping online allows us to get directly to a product we're searching for without walking past a single other product. There's no opportunity for peripheral vision, minimal real estate to merchandize related products, and minimal attention spans to intersperse much merchandizing into a goal-driven acquisition flow (like purchase). So the album remains an important merchandizing tool, even online.

"Katy Perry has sold 2.2 million downloads of her hit song "I Kissed a Girl" in the U.S., nearly 10 times the 282,000 copies she has sold of her "One of the Boys" album."

"Rapper M.I.A. has sold 888,000 downloads of her surprise hit "Paper Planes," compared with 272,000 copies of the album "Kala."

"Last year, U.S. consumers downloaded 844 million individual songs from digital-download stores, according to Nielsen SoundScan. By contrast, they bought only 50 million digital albums."

Finally, let's look at how iTunes' insistence on a la carte singles downloads may be directly hurting the music business, perhaps even as much as illegal downloading.

"In so many ways it's turned our business back into a singles business," says Ken Levitan, Kid Rock's manager. Mr. Levitan says the rise of iTunes is far from being a boon to the industry; instead, he calls it "part of the death knell of the music business."

"...many of [Kid Rock's] 1.6 million U.S. album sales [which is not available on iTunes] to date would instead have shown up as 99-cent downloads...

"AC/DC has never licensed its music to iTunes. The Australian hard rockers sold an estimated 2.7 million CDs world-wide last year, up from 2.55 million in 2003... [Meanwhile] Overall U.S. album sales -- of both CDs and digital downloads -- declined 21% to 500 million copies in 2007 from 2003"

Since the beginning of 2006, only the Beatles have sold more "catalog" albums in the U.S. than AC/DC -- also without licensing their music to iTunes.

"...the act that sold the most individual songs digitally -- the Rolling Stones -- sold the fewest albums..."

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