Apple Isn't Changing the Music World; It's Working With It

by Derrick Story

Maybe without realizing it, Apple's Music Store has poured gas on an already hot fire. If you look at the comments following the Billboard story on O'Grady's PowerPage, you'll see what I mean.



One of the hottest issues has to do with how much of that 99 cents per song the actual musicians get, versus the slice that Apple and the record companies collect. Apparently, the musicians get very little. According to the conversation, it's reported that Apple gets about 35 cents per track purchased, and the record companies get the rest. The musicians are paid from the cut the record companies collect, and it probably isn't more that a few cents a song. I'm not trying to report the actual numbers here; I'm trying to frame the conversation. Maybe we'll get hard numbers from someone in the know.



This is a conversation that merits discussion. Apple is not changing the music world. They are working with the existing model. In essence, the Music Store represents a new access point for consumers, and hopefully more sales for artists and their labels. Don't get me wrong, this is a good thing. I think Apple has brought a degree of good Karma to the music scene. But I also think it could be the start of even better Karma.



If Apple is smart, and I think those in charge are, they will listen to both sides of this discussion. Because, even though the Music Store represents a new, but somewhat conservative way to purchase music, it could become a powerful engine for independent labels who want to treat their artists differently (aka better!) than the big five.



Talking about thinking differently. If Apple were to offer this service to artist-friendly companies, and let everyone compete side by side in their Music Store, then we could see a true revolution in music distribution. What would happen if indies were to offer their songs for 45 cents in the Music Store versus the big five's 99 cents?



My heart races at the thought...


20 Comments

anonymous2
2003-05-01 08:44:26
Music biz economics
There's often been a misunderstanding about the mark-up of music - retailers who charged those 'outrageous' prices of $17/CD were touted as the bad guys, but their markup was a paltry 40% at most/best - compare that to the 200-300% markups on clothes, food, jewelry, and other retail wares and you see why music retail was hit. Loss leader companies like Best Buy could undersell the CDs since they have the markup of higher ticket items. The labels would not lower their cut of the pie, and an artist would be lucky to make $1 per CD - typically it was way less. I think this article is right on track, the big labels aren't going to be the ones to lower their cut even with the savings in distribution, shipping, etc. They are the epitome of cutting their noses to spite their face...
anonymous2
2003-05-01 09:37:34
Apple music store
From my personal experience, and I doubt I'm the only one, every purchase I've made is one I wouldn't have made if the music store didn't exist.
It so easy to roam thru the site and preview artists and songs I would never think of buying.
My point is that every penny the artist gets from my purchases are a penny who would not be getting. Am I so different than others?
derrick
2003-05-01 10:38:03
Apple music store - Absolutely
I agree. I've already purchased many tracks myself that I've wanted for years, but didn't have the money to buy the whole album. So yes, everyone has received some of my $$$ that they would not have otherwise.


Here's what I'm thinking though. I want the indies to get more of my money too. And this Apple Music Store is a great delivery system. I'm thinking that the independent labels don't have the overhead that the big five do, and they can offer great music for less. And if they wish, pay the artists a bigger cut too.


I really like this Apple model. But now I'm thinking about using it in a way that could truly benefit new artists.

derrick
2003-05-01 10:45:58
Music biz economics -- Apple's overhead too...
Along those lines, some people are complaining about Apple's cut. I'm not qualified to say if it's too high or not. But I do know this, the delivery system that they've had to build to make this store work so well is impressive and difficult.


I sit right alongside our sysadmin and producers here at O'Reilly. I hear every day about the challenges it takes to run a popular Web site. Then I think about the additional challenges that Apple has overcome with its Music Store. Based on my experience, I'm more impressed with the backend sophistication than I am concerned about Apple's cut of the action.


Plus, with time, costs should come down, just like everything else in technology.

dsteinberg
2003-05-01 11:26:23
indies and artist compensation

In his Time magazine interview, Jobs answered the question as follows. "They've already been calling us like crazy. We've had to put most of them off until after launch just because the big five have most of the music, and we only had so many hours in the day. But now we're really going to have time to focus on a lot of the independents and that will be really great. "


As far as artist compensation goes, it seems to me that it is no longer a technical issue. With Apple's store labels aren't paying for shipping, production, inventory, marketing, in-store displays, ... all of the traditional reasons they used for justifying the percentage they kept for themselves. Most of those functions are being performed by Apple's infrastructure and hence Apple's cut. We'll see if this and other distribution schemes help change an industry that needs changing.


anonymous2
2003-05-01 11:44:59
5 cents per track to Apple?
I have seen analysts talk about only 5 to 10 cents per track net to Apple (after paying Akamai etc) so maybe that's all they make.


"It's a positive. It's a good thing. It's nice to see the industry moving. But what's the quantification of the revenue and earnings impact?" ....


Analyst Richard Gardner at Smith Barney Citigroup breaks it down like this. If 300,000 users were to embrace it and download 25 to 50 songs a month per user ? say net profit to Apple was between 5 and 10 cents ? Music Store would still only add less than 1 cent to Apple's quarterly earnings per share."


http://www.globetechnology.com/servlet/story/RTGAM.20030430.wappl430/GTStory

fordgj
2003-05-01 12:21:36
It's just starting
Apple needs music from the big five to get the this venture on its feet, that's just a fact. What will change this is when the music store starts to carry more independent labels. This puts smaller labels on a far more equal footing. It will also make smaller labels more attractive to artists, because artists that go with smaller labels will likely get more of that 65 cents. Apple can't just pay artists directly, it isn't efficient that way. They need middlemen. The key is that this creates a fairere market in which the costs of the middlement will be forced down and the profits of the artists will go up.


Another issue is DRM. It is entirely possible that Apple could create different levels of DRM and compression. It has been speculated that the labels are the ones that wanted to limit the bitrate/quality of the music. Smaller labels will have a motivation to allow looser DRM (as if it isn't loose already) and provide a higher quality sound than the big labels. This is a more flexible and more efficient medium, and therefore it opens a whole host of possibilities that fundamentally change the music industry.

anonymous2
2003-05-01 12:31:27
Give them feedback
Step one is to send Apple a comment. I'm in an independent band and also see huge potential for the apple music store. Not only would it prove quite useful to people like me, but it would give the store a sense of depth. It doesn't need to be free to participate, just reasonable. If you agree, drop Apple a line through the link in the store.


-Alex
www.thestandardsrock.com

derrick
2003-05-01 13:07:45
Give them feedback -- Yes
Thanks for the reminder. I should have mentioned that in the 'blog. I think most of us realize that there are many complicated issues involved here. But if we let Apple know the direction we'd like them to take this, maybe they can move things in a positive direction. They seem to be off to a good start.
anonymous2
2003-05-01 13:55:45
Music biz economics -- Apple's overhead too...
I totally agree that the Music Store is a wonderful piece of work, just like many other Apple innovations. Those clueless whiners obviously don't understand or appreciate how much money and effort it takes to build and maintain such a high quality service, I bet they will always complain as long as it's not free.


I haven't bought a music CD for a long long time, but will definitely be attempted when the service becomes available over here in the UK. For now, I really enjoy just browsing and previewing.

anonymous2
2003-05-01 15:42:26
5 cents per track to Apple?
That's direct profits from the Music Store. It doesn't consider indirect profits from sales of computers, iPods, software, etc.


There is an element of "killer app" thinking here: is this app. good enough on its own to make people go out and buy Macs and iPods?


As such its a rather silly statement coming from an analyst who surely should know enough to look past the direct products and see the bigger picture.


So... how much does Apple make per computer or iPod?

anonymous2
2003-05-02 05:23:05
Apple music store - Absolutely
In another way it still doesn't really change the _model_ just the details of the method. I would be curious to see what kind of contracts Apple has signed with the "Big 5". How exclusive and under what conditions is this deal? The biggies have a reputation of using Microsoft like tactics to block out the smaller guys. How can we be assured the same thing hasn't happened now?


What would really make a difference, especially if Apple isn't interested in dirtying their hands with less lucrative labels/artists, will they make this technology available (for a fee of course!) to be utilized by others? In other words open the technology up to let others open their own "iTunes" stores/servers, but still utilize iTunes as the store front.


Rosen touting this just leaves me feeling skeptical of how "innovative" this really is. It just seems to pander to the big boys and not really fundamentally change a thing.


Just my thoughts,
Joe Futral

derrick
2003-05-02 10:43:58
Apple music store - Deal Cutting
Some good points in your post.


We can be pretty sure that Apple had to cut deals it didn't necessarily want to in order to get the buy-in of the big 5. My guess is that there are "exclusivity" clauses all over the place.


But, if the Music Store takes off the way I hope it will, then maybe Apple will be able to negotiate less exclusive deals up the road. That would open the door for other contracts with other entities... and different rules.


It took a long time for the music business to get where it is today; it's going to take some time for it to change. Even with an entity as innovative as Apple involved.


Also, I don't see Apple offering this technology to anyone else. they'd be crazy to. They are in an economic fight for their life and this might be one of the products that helps them survive.


I'm hoping that they can evolve the store so that its offerings are as broad as possible, working with as many different entities as manageable. What if this became the Amazon.com of music...

eccentricanomaly
2003-05-02 12:51:00
Longer Previews
The option to offer longer previews would help small-time artists to get their songs heard... that and being able to make playlists of the previews so that websites could put out playlists of samples of hot new bands.
anonymous2
2003-05-02 18:51:04
Apple music store - Deal Cutting
>>Also, I don't see Apple offering this technology to anyone else. they'd be crazy to...


...What if this became the Amazon.com of music...<<


That's kind of what I was talking about. Even Amazon opens their "store front" to other retailers. "Amazon doesn't have the book? Well, try these other stores from our market place!" They even offer new and used from other, smaller, stores. Amazon gets a cut, the smaller stores get exposure and a sale.


iTunes could certainly do something similar. Apple doesn't want to invest or see the return on investing in additional hardware for the indies? Well they can still set-up with Apple to sell through iTunes, they just supply the back-end hardware and network connection, Apple supplies the needed front end and transaction infrastructure in return for a piece of the action.


Still thinking,
Joe Futral

anonymous2
2003-05-03 18:46:55
All it will take
is one "mega artist" to make a direct deal with Apple, thus bypassing the rekkid companies, and the floodgates will be open. Everyone else will want a direct deal and a bigger slice of the pie, and the rekkid companies will be stuck with their back catalogs and CD sales.


They'll want to make some money, of course, so they'll sell on line, either with Apple, or using a similar model. So, we win.

derrick
2003-05-04 08:35:30
Recent Posts Are on to Something
I think the recent posts to this 'blog are making important points. Apple has opened up a new possibility. What if they were to contract with individual mega stars, or let indies cut different deals offering longer previews, or sometimes even full length previews? How could Apple evolve this to become the Amazon of online music?


We all know that at the moment there are restrictive contracts, legal liabilities, and all that stuff. But that's left over stuff from the last regime of music. It doesn't have to stay that way. The reason why it has for so long is because we didn't have a viable business alternative. We do now.


And you know that if you and I are thinking about this stuff here, then believe me, the people with big money are thinking about it too. I really sense that the winds of change are upon us.

anonymous2
2003-05-05 06:29:18
Recent Posts Are on to Something
How to make it more like Amazon - two words - 'affiliate program' ;)
Seriously, though: I see an opportunity for several new-model labels to emerge, who forego the traditional retail model (with shipping, supply chain/fulfillment, marketing, real estate, overhead, staff, etc.) for a direct-distro model where costs are online promotional/advertisment mechanisms, legal fees, and (if needed) digitizing/encoding. A new breed of indie who specializes in online models, esp. one who could offer a second specialty in touring... -L
anonymous2
2003-05-12 17:34:39
Recent Posts Are on to Something
How long before Apple has a club where you download 12 tracks for a penny with a contract to purchase 20 tracks over the next three years? :)
derrick
2003-05-13 16:10:35
Recent Posts Are on to Something - 1 cent sale
OK, but if they start sending me songs once a month because I forgot to check the "No" box on the special, I'm putting my foot down. :)