Online Music Sales Faltering

Online music sales--in particular, those from the Apple iTunes Store--appear to be falling year-over-year. This news has numerous ramifications, among them the fact that, despite billions of song sales, iTunes hasn't offset the declining sales of music CDs. Why isn't iTunes performing better as the music industry transforms to what was previously seen as an inevitable model of digital distribution?

According to Forrester Research, iTunes experienced a massive 65 percent drop in sales in the first half of 2006, after two years of steady gains. Overall transactions on the iTunes service--including TV shows, videos, movies, podcasts, audio books, and music--declined 58 percent between January and June 2006, analysts say. Furthermore, people are spending less money on iTunes: The average transaction amount fell 17 percent during the same time period.

Although Apple denies the drop-off in sales without providing any sales figures, there are many other indications that iTunes isn't performing as well as it has in the past. A report last week in "The Wall Street Journal" cited Nielson SoundScan figures showing that iTunes music sales actually dropped in the second and third quarters of 2006 compared with the same quarters in 2005. This is the first time that's happened, "The Wall Street Journal" reported.

In a meeting to discuss Microsoft's Zune initiative, I was told that Microsoft's consumer research shows that the iTunes attach rate--that is, the number of songs consumers purchase per each iPod sold--is alarmingly low, suggesting that Apple's hold on the market is more tenuous than previously thought. Most consumers appear to purchase a few songs or TV shows and then abandon the service for good. My discussion with Microsoft took place before "The Wall Street Journal" report was published.

The music industry, which has frankly done a terrible job of adopting and embracing digital distribution technologies, isn't sure where to turn at this point. Music CD sales are down, and some companies are beginning to experiment with selling unprotected MP3 files to consumers, to determine whether the strict copy-protection schemes employed by iTunes and other services are causing the low sales. Meanwhile, alternative music-distribution schemes, such as music service subscriptions that have monthly or yearly fees, haven't taken off in the digital music market as expected.

As for Apple, it still dominates both the MP3 player market (with its iPod devices) and the online services market (with iTunes). But evidence suggests that Apple's desire to drive online content sales and even sales of Macintosh computers via the iPod never materialized. The so-called iPod Halo Effect, analysts say, might be more wishful thinking than reality.

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