The Decline and Fall of the iTunes Music Store

To hear Slyck tell it (iTunes Sales Continue to Fall, 2003.07.30), the iTunes Music Store (iTMS) is in big trouble. After a hugely successful launch of 200,000+ tunes, sales have dropped to about 50,000 per day during the past month. Worse yet, there seems to be no end in site for this decline.

Fortunately, Slyck includes links to several articles reporting sales figures from iTMS. I've compiled them into an AppleWorks spreadsheet, graphed the data, and here's exactly what it looks like (click here to download a stuffed copy of the file):

I've graphed this data using a logarithm sales axis to keep total sales from so dominating the chart that overall average sales and average sales from each reporting period disappear at the bottom of the chart. For the record, Apple sold 6.5 million tunes through July 22, which averages over 75,000 per day over the history of the service.

But what's really important is the fact that the average from June 23 through July 22 was 51,700 tunes per day - and this was down from over 70,000 tunes per day during the prior two reporting periods.

Failure?

It's not unusual for a new product to have a popularity spike followed by a decrease in sales. Most movies spike the first week and sell less tickets each following week until the theater decides it's no longer worth showing. Articles on this website get most of their hits the first few days, decline quickly, and either fade into obscurity or perhaps continue to receive a few hundred hits a month for years.

As Slyck notes, "there is a clear decline in place," but it's a matter of conjecture whether this is due to normal new product sales curves, seasonal decline (especially students on summer break), or "failing to sign up some big bands," as the author speculates.

In the reader forum linked to this article, many posters seem to consider anyone who pays to download legally available tunes a fool, apparently prefering the illegal downloading of MP3s that's been going on for years now.

I have a feeling that the folks at Apple knew this was going to happen, knew that they wouldn't continue to sell 200,000 tunes like they did the first day, knew that there would be a leveling off of demand. I certainly don't anticipate the iTunes Music Store fading into obscurity with a continued decline in demand. At some point iTMS will reach its natural sales level, which may well be below the 50,000 tunes per week level - at least until iTunes for Windows (iTfW) becomes available.

Success with Windows

Of perhaps 25 million Macintosh users, only 7-8 million have adopted OS X, which is the minimum requirement for using iTunes 4 and the iTunes Music Store. Of that number, Apple is currently selling approximately 1 track per day per 160 OS X users. We'll assume that all OS X users use iTunes, although not all use iTMS. We'll further guess that this will decline to 1 track per day per 200 users, which would result in a level of 40,000 tunes sold per day.

Apple currently sells about 3 million computers per year and has a worldwide market share of about 3%. That means that worldwide personal computer sales are somewhere around 100 million units per year, and the vast majority of these ship with Windows (mostly Windows XP).

Depending on whether iTunes for Windows is written specifically for WinXP or more broadly to work with older versions of Windows, there may be 200 million to 500 million Windows PCs out there that could download and run iTunes and access iTMS when Apple has everything ready later this year.

It may be an uphill battle to convince Windows users to visit the Apple website and install a free copy of iTfW on their computers. Once they've done that, it shouldn't be too hard to get them to visit the iTMS, listen to some samples, and sign up for the service.

If Apple can get 50 million copies of iTfW out there and sees a long term purchase rate of 1 track per day per 200 users, iTMS sales will average 250,000 tracks per day to Windows users alone - and their rate could be higher, since these users will be specifically choosing to install iTunes on their computers.

As more Mac users adopt OS X with the release of the G5 and Panther later this year, the level of iTMS purchases by Mac users will grow. Between the platforms, it's quite possible Apple will be selling 300,000 tunes per day. Figuring half those tracks are albums at $9.90 and half are singles at 99¢, that's over $250,000 a day coming in through the iTunes Music Store.

Of course, these numbers are pie in the sky conjecture. Apple may fall flat on its face offering a free copy of iTunes to Windows users. Maybe only 10-20 million will download it. Or maybe Apple will do such a spectacular job of marketing iTfW and iTMS that 100-200 million Windows users will become regular iTunes users. And their purchase rate may be higher than that of Mac users - who knows.

Even taking a pessimistic figure, there may be 25 million iTunes users who can access iTMS by the end of the year. Even at a purchase rate of 1 track per day per 250 users, that could be 100,000 tunes per day and $80,000 a day coming into Apple through iTMS.

Considering how highly automated the entire system is, we're talking a service with minimal overhead and high profitability. 36 million tracks per year would bring over $30 million through Apple's doors, and a fair percentage of that will remain in Apple's hands. Over a hundred million tracks a year would result in over $80 million in sales.

These are ballpark figures, but they show how successful Apple could be once the Windows version of iTunes is available for download. As with the initial launch of iTMS, there will be a sales spike the first week as Windows users install iTfW and visit the iTunes Music Store, but even when things settle down, Apple will continue to have a very steady revenue stream to complement what they make selling computers, software, and iPods.

I don't see any trouble ahead.