NEWS: iTunes Store May Capture One-Quarter of Worldwide Music by 2012

iTunes Store May Capture One-Quarter of Worldwide Music by 2012

Since its debut five years ago Monday, Apple's iTunes Store has sold more than 4 billion songs and accounts for approximately 70 percent of digital music sold worldwide. In the next five years, it may well account for a staggering 28 percent of all music sold worldwide.

By 2012, digital music is projected to account for 40 percent of music sold, according to InStat. If Apple holds onto its current market share, it will account for more than one-quarter of all music sales by its ninth birthday. Not bad for freeware.

"I'm very skeptical about whether iTunes can be unseated, because there's not a lot of consumer pain there," said Paul Resnikoff, editor of Digital Music News.

Digital Music News recently found that iTunes is installed on nearly 30 percent of all computers worldwide, making it the most widely installed music store application in the world.

When Apple snapped up a little music program called SoundJam MP back in 2000, no one predicted that the iTunes application it became would lead to a complete restructuring of the music industry.

Like all journeys, iTunes' reinvention of the music business began with a single inauspicious step. The major labels agreed to license their music only to Apple because the iTunes Store ran exclusively on Macs, representing a "sandbox" in which the labels could test the fledgling online music market.

Of course, once the labels saw Mac users snapping up their songs, the Windows version followed soon after, setting the stage for iTunes' dominion over the fledgling digital music market, which it has held onto ever since.

The key to iTunes' continued success has clearly been the iPod, but as iPod sales plateau, Apple may need to rethink its iTunes strategy, especially because its partners in the music business are looking for ways to give its competition an unnatural advantage.

"Apple is under pressure from the four major labels to change its pricing model to a tiered pricing structure," said Susan Kevorkian, an IDC audio analyst. "The way the labels are pressuring Apple is by withholding DRM-free downloads from the service … [while] cultivating other online music services, most notably Amazon's MP3 downloads store."

But despite its compatibility with the iPod, Amazon isn't stealing many customers from iTunes -- only10 percent of Amazon MP3 customers have bought from iTunes in the past.

"They're playing on the periphery of this dominant iTunes application," Resnikoff said. "Why would I want to go outside of that?"

Despite the apparent toothlessness of the current Amazon threat, pundits agree that Apple needs to make significant changes to maintain its lead.

Kevorkian thinks Apple should cede to label demands for tiered pricing to stave off a possible migration to stores that lack DRM and offer lower prices. Besides, she says, Apple's 99-cents-per-song strategy has served its purpose: to put digital music "on the radar" of the music-buying public.

Apple has other ways to grow iTunes without relying on the iPod -- even ideas Jobs has pooh-poohed in the past, such as music subscriptions. The most obvious (and least likely) scenario is a PlaysforSure-style subscription service, which would require a new, stronger version of FairPlay DRM and rule out compatibility with older iPods.

A more likely option would be an eMusic-style subscription in which customers get a fixed number of songs per month, receiving a better deal than if they'd purchased the songs individually.

Then there's the so-called "unlimited music" iPod, which could be on the horizon. "We think the issue holding things up is how much money per iPod the labels get," Kevorkian said.

If Apple tires of butting heads with the labels, it could eventually cut them out of at least part of the equation by forming its own record label to keep a portion of the estimated 65 cents it currently pays out to the labels for each song sold.

"Digital distribution makes the economics of the industry so different," Kevorkian said. "That, coupled with Apple's tremendous brand name and reputation as an online music distributor, could make it a very important point of departure."

All it would take, she said, is the addition of an A&R department for scouting bands.

Dan Frakes, senior editor of MacWorld, agrees: "I think Apple will eventually work directly with the creators of content, allowing iTunes to sell original content without having to go through the entertainment industry."

Only Steve Jobs knows which of these paths Apple will take, but in general, iTunes' prospects for the next five years looks about as bright as they have been for the last five.

"If Apple keeps doing what it's doing," Resnikoff said, "I don't think you'll see any factors really eroding iTunes' installation percentage. It's an application that works so well."