December 13, 2006 3:09 PM PST

Gloomy iTunes predictions premature

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The imminent demise of iTunes appears to have been somewhat exaggerated.

Reports that iTunes sales plummeted during the first half of 2006, based on a survey from Forrester Research, whipped up the familiar waves of righteous indignation or schadenfreude, depending on one's stance on Apple.

The music industry would certainly like to see better growth from digital music sales, but the Forrester report is based on a small sample size and indicates that it's too early in the digital music era to be drawing conclusions about the habits of online music buyers, said Josh Bernoff, the author of the report, on Wednesday.

The release of the survey last week got the frenzy going with data indicating that iPod owners, on average, don?t buy all that many digital music tracks through iTunes. A different study by Ipsos earlier this year reached a similar conclusion: most people are ripping songs into their music library from CDs, not downloading them from online music services.

Forrester's report also concluded that the number of monthly iTunes purchases per 1,000 households declined by 58 percent from January 2006 to June, Bernoff said. This was the number that was prominently featured in many reports suggesting that Apple's iTunes momentum was waning.

However, the next sentence reads, "With only two years of full data, it is too soon to tell if this decline was seasonal or if buyers were reaching their saturation level for digital music." A similar but smaller decline occurred last year from January to June, driven by new iPod owners who filled up their holiday gifts with music in January and bought fewer and fewer songs as the year wore on, Bernoff said. Seasonal declines are common in mature industries like the PC market, in which sales during the first and second quarter of the year are often much lower than sales during the third and fourth quarters of the previous year.

And the 58 percent decline is based on purchasing data from just 181 U.S. iTunes-buying households, Bernoff said. Only 3.2 percent of the 5,580 U.S. households in Forrester's panel bought music from iTunes between June 2005 and June 2006. The households in the panel volunteered to have their credit card purchases monitored. Therefore, the survey does not include iTunes songs bought with gift cards or through PayPal's online payment service.

To understand the numbers further, Bernoff notes that of the 181 households, one-third of those households accounts for 80 percent of all iTunes revenue. Most businesses naturally follow the famous "80/20" rule, in which 80 percent of a company's revenue comes from the top 20 percent of its customers. But in Apple's case, this means that there are relatively few heavy users of iTunes and lots of infrequent or occasional users, Bernoff said. Thirty-two percent of the 181 households only bought one song from iTunes last year, and just 31 percent bought six or more songs.

Apple was quick to deny that its iTunes sales were collapsing. "The conclusion that iTunes sales are slowing is simply incorrect...iTunes sales represent nearly 6 percent of all music sold in the U.S., making us the fourth-largest music retailer," the company said in a statement. But Apple did not elaborate on the specific numbers in the report or provide its own data on broader digital music buying trends, making the Forrester data one of the few sources of iTunes purchasing habits.

The main conclusion of the Forrester report was that with such low participation rates, digital music sales are not saving the music industry right now. Apple continues to see growth in both the number of iTunes songs sold per year and the revenue it takes in from those songs, but that growth is not enough to make up for the decline in CD sales, Bernoff said.

Piper Jaffray released a report Tuesday indicating that Apple sold 390 million songs from January through September 2005, or about 10.4 million songs per week. During the same period in 2006, Apple sold 695 million songs, or about 18.5 million a week. In the last few months, the ratio of iTunes songs sold per iPod has actually increased from a historical ratio of 20 songs for every iPod to 23 songs per every iPod, according to Forrester.

"That's pretty good," Bernoff said Tuesday in an interview. "On the other hand, the music industry can not be saved by (23) songs per iPod. Imagine if people only bought two CDs for every CD player."

So while the data in the Forrester report suggests that the overall market for digital music still has a long way to go, Apple's iTunes business is in decent shape, Bernoff said. The company isn't making much money selling digital music, he said, but there's no indication that Apple is concerned about its low iTunes margins given its record financial performance this year.

The growth of online digital music sales is slowing, however, which is a little troubling considering the extremely small number of overall consumers buying music online, Bernoff said. "If people don't continue to buy after they've had the iPod for a while, that's not particularly good news for the industry," he said.

See more CNET content tagged:
Forrester Research Inc., household, digital music, Apple iTunes, online music

40 comments

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You've got to be joking
Anyone who knows anything about statistics knows the Forrester's methodology is fundamentally flawed. There is no way you can draw relevant conclusions from a self selected sample of 181 households that supposedly represent the iTunes Store user population.
Posted by MadKiwi (153 comments )
Reply Link Flag
Not joking
These so called professional analysts look to their crystal ball
and predict the future. Usually they are wrong but no-one
seems to remember. If they had been right years ago Apple
would not even be here today.

If these "experts" knew anything they would be running their
own companies. When they can't do that they have to take jobs
that tell others how to run their companies.

I think I am like a lot of iTunes users. I get a lot of iTunes gift
cards and make a lot of purchases right after the holidays.
Forester doesn't know about me or people like me. They only
know a little about a whopping 181 people.

If you remember, iTunes is not and was never meant to be an
Apple cash cow, iPods are. If Apple can just break even on
iTunes and sell tons of iPods they have a good business model.
Last I read, Apple was expected to sell over 17 million iPods this
quarter.

Sorry Forrester, your article is not newsworthy. Maybe you need
to look harder for some real experts.
Posted by nouser (191 comments )
Link Flag
Interesting how that turned out, isn't it?
Pretty funny, really. Forrester deserved it, considering the slapdash methodology and its hell-bent attempts to be the smartest guy in the room.

Now all we need to do is see how MSFT paid 'em off, exactly. Oh, wait - Forrester has been a staunch MSFT shill for years now.

/P
Posted by Penguinisto (5042 comments )
Link Flag
Who's Behind This Then, The Over 55s?
I put this in the same camp as the 'half of Mac users are over fifty
five years old'.

Someone doesn't like Apple's success.

Ross Bellette/.
Posted by Bellette (22 comments )
Reply Link Flag
iTunes is fine but there are alternatives
The itunes model is good. However any system that tries to wrap up an industry will eventually be given the 'cold shoulder' - even from the the most fervent cult participants.

There are alternatives to the proprietry systems like msn, napster and apple, uncooked records is a good example.

The strange thing about iTunes and not specific to iTunes is the way artists are still not given direct exposure to their fans, money is siphoned away by the services that sell the tunes...
Great model for apple - to clip tickets, not so great for artists? Any artists care to comment?
Posted by therealgeeves (441 comments )
Reply Link Flag
Lions Den
The Lion's share of the sales goes to the RECORD LABEL STUDIOS + ROYALTIES TO THE ARTIST.

Apple makes very little from their sales of tunes, they make their money from the iPod sales.
Posted by Llib Setag (951 comments )
Link Flag
Give it time
The iTunes Music Store was the deciding factor in making music
downloads viable. Way back when, there were a couple of
services and none of them was popular. Along comes Apple to
show the world how to do it, and people wake up to the
possibilities. Magnatune (to name one) and an independent
pseudo-label for artists (whose name I can't remember) are
some examples of people trying to get us where we all want to
go - use our incredible communication and distribution
capability to bring artists to fans directly and have communities
raise talent to wider awareness - change is painful, and it
doesn't happen overnight. However, I'm overall optimistic - the
internet isn't going anywhere, artists will always create, and
people will always want to listen. We'll get there!
Posted by scottk0640 (23 comments )
Link Flag
The problem isn't iTunes
It's the record labels. They're the ones requiring DRM, and they're
the ones that take the bulk of the money. If they remain greedy,
maybe Apple & others will deal directly with the artists. That would
solve two problems at once, getting rid of DRM while bringing
more money to the artists.
Posted by Macsaresafer (802 comments )
Link Flag
Cost of serving a song...
I'll pipe in as I was the first non-signed artist on iTunes.

Apple takes roughly $0.29 per $0.99. That is to cover costs on
their end. Those costs include the one-click buying license/fee
they pay to probably Amazon (or who ever has that patent), you
also have to figure ISP costs, server costs, credit card processing
costs, and other stuff I probably don't know about and you can
see that that $0.29 doesn't spell a whole lot of profit for Apple.
That's some things I think people tend to forget.

For me, my distributor takes a very small cut 9% from the
remaining net amount after Apple's cut. Thus I tend to walk
away with about $0.637 on a US sale. It's more for a foreign sale
because of the poor condition of our US dollar.

So, I don't think Apple is ripping anyone off on the price with
their cut. I do feel bad about artists that are signed because I
hear the most they get from a sale is about $0.10, if they're big
stars. The lesser knowns get something like $0.08. The label
does have to pay $0.915 to the writers of the song. So the labels
tend to walk with about $0.44 a song to cover their costs for
marketing and promotion.

Really as an non-signed artist it's a nice return. But then since I
don't get any where near the same exposure as say Avril or
Maroon 5, I don't sell enough to make it a way to tour and/or
retire. However, I'm doing what I can to change that. And
contrary to the Forrester report, I've seen an increase in iTunes
sales in the past two months.

If you're interested in my sound my name is Jody Whitesides and
my current CD that was recently released is Practical Insanity. Its
along the lines of Maroon 5 hangin with John Mayer and Lenny
Kravitz. And of course I'm on iTunes. Working on putting up a
huge Christmas CD right now.

Hope that shed light on your subject.
Posted by jwhitesides (11 comments )
Link Flag
An Artist
I am Sharian, on iTunes/ CD and other download sites.

I have spent thousands recording my first and second albums.
No other site has given me the level of sales and exposure that
iTunes has. The recording companies do promote your records
but due to my ethniciity and style of music only fringe recording
companies are willing to record mine. So fringe companies are
not able to promote their atists as much as larger ones.

The actual money I make per sale might be less on iTunes
compared to a CD sold, but CD's sales are down worldwide and
are nothing compared to iTunes numbers.

The simple number of iTunes downloads makes up for less
profit-per-song, ten-fold.

For me, my album sales on iTunes has been the best source of
revenue and more importantly 'exposure' so far.


Sharian
Posted by CyrusTheGreat (6 comments )
Link Flag
iTunes Sucks
I hate it...

All I want is some small little app that lets me put my songs on my iPod. I don't need it to rip CDs or burn MP3s, I don't need it's crappy little store. Really if iTunes was a decent music store then where the hell is all the Radiohead? Granted they have some really cool stuff that is kind of obscure like Saltillo, but Radiohead is a pretty big name and they are noticeably absent in iTunes.

The only thing I use iTunes for is to put content on my iPod and for that one little task, iTunes is extremely bulky.
Posted by SeizeCTRL (1333 comments )
Reply Link Flag
I'm sure the whole computer industry
will now write software for your specific desires.

Fortunately for you in the meantime, if you don't want to use all the
extra capability built into iTunes, you don't have to, and it won't get
in your way. For the rest of us, mixing smart playlists with manual
playlists are great, and the iTunes store is without a doubt the best
on the internet. Oh, and the video & tv downloads are good too.
Posted by Macsaresafer (802 comments )
Link Flag
It isn't iTunes fault
Radiohead isn't on iTunes because they don't want to be. You can't
blame Apple/iTunes for that. So blame the band you're a fan of.
Posted by jwhitesides (11 comments )
Link Flag
Who is Radiohead?
Just cos you listen to Indie, doesn't mean I or other people do or
have any desire to.

And with iTunes, all you have to do is plug in iPod and it syncs.
What is so complicated with that?
Posted by CyrusTheGreat (6 comments )
Link Flag
Look at the other applications then.
Try: <a class="jive-link-external" href="http://www.google.com/search?q=ipod+windows+utility&#38;ie=utf-8&#38;oe=utf-8" target="_newWindow">http://www.google.com/search?q=ipod+windows+utility&#38;ie=utf-8&#38;oe=utf-8</a>

If you have a Windows PC, take a look at Anapod. I've owned it since it first came out and on Windows it works great and has a lot of neat features.

You can also check out vPod, a free transfer utility.
Posted by brian.bezanson (6 comments )
Link Flag
Alternatives
Download Ephpod

<a class="jive-link-external" href="http://www.ephpod.com/" target="_newWindow">http://www.ephpod.com/</a>

It's awesome. It'll just sync and move files. No store.
Posted by mf193 (12 comments )
Link Flag
i tunes
i seen in news that i tunes isn't very good well in my thoughts its the best i've seen in the last two years i'm new to the compter world but i tunes was easy to under stand and use so i highly recamend it to all who liketo keep there music organized and handy also if you have or plan to get an i pod there made for each other hope this was helpfull to you i like the site very much i give it a 10++
Posted by sonny cross (1 comment )
Reply Link Flag
I find it curious
that there are constantly articles proclaiming Apple's demise. I
don't know iTunes sales figures from potato sales figures, all I do
know is that I spent approximately $20 a month on the iTunes
store. In the last couple years or so, since the intro of TV Shows,
probably closer to $30.

If even a fraction of the iTunes users are like me, I don't see any
lack of sales for Apple.
Posted by corelogik (680 comments )
Reply Link Flag
iTunes bashing
Funny to see a report with so little tangible information make the
news without cross-examination.
The timing follows the launch of Microsoft Zune player and
precedes the upcoming royalties discussion between Apple and the
Record Industry.
Everybody loses except...
Posted by Alan_Zapper (1 comment )
Reply Link Flag
BINGO!
Follow the money my friend &#38; I'm willing to bet that Forester &#38; Ballmer have exchanged money or stock for that lame "analysis" regarding Apple's iTunes sales....

Microsoft : " We need to up the anty regarding getting the message out about our investment into digital music...spending more money to promote the 'alternative choice'..." C|NET Zune article
Posted by Llib Setag (951 comments )
Link Flag
No one spoke of "imminent demise"
I do know that there is still a debate between the two analysts, but I don't think that Forrester was depicting an imminent demise" by saying sales had fallen.

If they have fallen, then that's OK. Sales can't ALWAYS only go up no matter who it is. Rise and fall is part of business.

Plus, if Apple were so concerned about the analyst predictions, then perhaps they should just release numbers (aka proof) instead of simply crying foul.
Posted by toosday (343 comments )
Reply Link Flag
Let's hear it for those anal-ists!
Why don't we wait until Apple's quarterly financial report next month and see how accurate they were.
Posted by Norseman (1319 comments )
Reply Link Flag
Analysis
From a Greek background:

anal &lt;- We know what that means

ysis &lt;- to pull out of

analysis.
Posted by macrhino (39 comments )
Link Flag
Itunes slump
It's a great player, but it was only a matter of time before the way Apple restricts the music was going to bite them in the ass. (i.e. marketplace)
Posted by pwruser (5 comments )
Reply Link Flag
You're wrong
Apple did not authorize the DRM, the music industry did; Apple only implemented it at the behest of the industry. You have a better idea? Because all of a sudden everyone is going to be honest and not steal digital music?
Posted by bigpoppa--2008 (20 comments )
Link Flag
nobody said Apple was failing
The article said nothing about Apple sales or iPod sales; just itunes music sales. I have personally sworn off buying music downloads because I lost music I paid for due to DRM malfunctions. I bet I'm not the only one.
Posted by Michael Grogan (308 comments )
Reply Link Flag
Who cares -- pop music is a complete waste of time anyway
Sting is right, rock and roll is dead, and popular music is a stagnant wasteland. I can't see why anybody would bother stealing this crud, let alone paying for it. Recycled 1980's rap and hip-hop. Recycled punk-pop. Recycled soul/funk. And all by a bunch of "artists" manufactured by the music industry. We have untalented unoriginal musicians who get promoted for their ability to generate celebrity buzz (like Kevin Federline and Paris Hilton). There is not an original or interesting thought or note anywhere in pop music. And iTunes is just another way to commoditize this pointless drivel.
Posted by jl878524 (12 comments )
Reply Link Flag
Huh?
"There is not an original or interesting thought or note anywhere in pop music."

Ummm...only if you only listen to Clear Channel stations and watch MTV all day. Otherwise, you're kind of, sort of, maybe overstating it *just* a little. Ha!

Here's a very short list of interesting, modern pop artists who are not churning out pseudo-post-punk, crap rap or recycled 80s new wave:

Radiohead
Guster
Doves
Ben Folds
Joseph Arthur
Autechre
Aphex Twin
Squarepusher
Peter Gabriel (still got it)
Neil Finn / Finn Brothers (ditto)

Get your head out of the sand and stop being such a negative defeatist! Open your eyes and ears, brother!

-Mister Winky
Posted by Mister Winky (301 comments )
Link Flag
Huh?
"There is not an original or interesting thought or note anywhere in pop music."

Ummm...only if you only listen to Clear Channel stations and watch MTV all day. Otherwise, you're kind of, sort of, maybe overstating it *just* a little. Ha!

Here's a very short list of interesting, modern pop artists who are not churning out pseudo-post-punk, crap rap or recycled 80s new wave:

Radiohead
Guster
Doves
Ben Folds
Joseph Arthur
Autechre
Aphex Twin
Squarepusher
Peter Gabriel (still got it)
Neil Finn / Finn Brothers (ditto)

Get your head out of the sand and stop being such a negative defeatist! Open your eyes and ears, brother!

-Mister Winky
Posted by Mister Winky (301 comments )
Link Flag
comScore and Piper Jaffray Agree that iTunes Sales are Surging
Tom,

As you and Mark Twain correctly put it, the rumors of iTunes' imminent demise are indeed greatly exaggerated.

Here is some comScore data you and your readers should find interesting:

* comScore data shows that iTunes sales actually grew 84 percent during the first three quarters of 2006 versus a year ago.

* The number of buying transactions grew 67 percent.

* Dollars spent per transaction increased 10 percent.

* iTunes had 20.8 million unique visitors in November 2006, up 85 percent from November 2005.

Michael Rubin,
comScore Networks
Posted by merubin75 (1 comment )
Reply Link Flag
Yep.
Michael, I think you and ol' Gene Munster (#1 financial cheerleader for Apple) are closer to having it right than those Forrester clowns. Well, we'll see in January.
Posted by Norseman (1319 comments )
Link Flag
Reporting style
So the story seems like some hype created by the original survey taker. Although some people think this story was a waste of reporting, I want to applaud CNet for how they reported this story. On PC Mag, they just cut and pasted a "sky is falling" short piece. Here, CNet actually looking into the facts, questioned the horrible small sample size, looked at another market research group doing a similar study, and compared this survey to the real world.

Way to go CNet! You deserve a raise! Thanks for making the world a better place.
Posted by mikeburek (418 comments )
Reply Link Flag
Apple style
We all know if a story is not that good for Apple, it's hype.
Other sites just reported the results of a study, like you do with any news. CNET, aknowledging the sory wasn't that good for Apple and Apple fanboys users were angry (because I never see this kind of reporting with stories about any other company here on CNET), made sure to search for better news.
Way to go CNET. Keep those Apple fanboys happy.
Posted by Ryo Hazuki (378 comments )
Link Flag
Negative news for Apple always premature or simply wrong
Gotta keep those amusing and loyal Apple fanboys happy. And CNET does a great job with that, no questions about it.
Way to go CNET.
Posted by Ryo Hazuki (378 comments )
Reply Link Flag
tidbit
"Imagine if people only bought two CDs for every CD player."

Actually that's really not too far from the truth. Most consumer
electronics are such pieces of crap that they must be replaced very
frequently.

While a number do complain about broken ipods, their reliability
numbers are pretty good.
Posted by tedk7 (66 comments )
Reply Link Flag
 

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