Why iTunes is dying

As the iTunes Store celebrates its 10th anniversary, it's time to consider how it'll do in the next 10 years.

This Sunday was the 10th birthday of the iTunes Store, which enabled content providers to sell to consumers who had little trouble getting that same content for free. But, in the process, Apple’s iTunes Store has set the table for the rise of several other competitive services, which will bring its demise.

The appeal of the iTunes store, at least in 2003, was its legitimacy. Consumers at the time were inundated with piracy options, from Napster to LimeWire to the many browser-based options available. Until iTunes came along, these options were successful. In March 2011, just a few months after LimeWire was shut down, the Recording Industry Association of America (RIAA) filed a lawsuit claiming LimeWire owed the organization up to $150,000 for every download of 11,000 specific songs, which added up to $75 trillion. A judge dismissed that request, calling it "absurd," but the point was clear – consumers had cost record labels a lot of money through piracy, and were eager and willing to learn new systems that made content easier and cheaper to access.

RELATED: 10 years of the iTunes Store

So, Apple provided a technological alternative. The iTunes store gave users a pretty interface and a simple way to buy content on their own terms – individual tracks for 99 cents, albums for $10, movie rentals for $5, etc. Along with the iPod, Apple basically set the path for consumers to migrate away from piracy and toward a more mutually beneficial relationship. Especially in the face of internet piracy, Apple reaching the 25 billion song and 40 billion app download milestones prior to iTunes’ 10th anniversary is extremely impressive.

Moving ahead, though, the iTunes Store is facing a bleak outlook.

Currently, iTunes’ share of online music sales stands at 63%, its lowest figure since 2006 and a steep drop from its peak of 69% in 2010, market researchers at NPD Group recently told Businessweek.

The reason? Just as iTunes was the bellwether for consumers who needed a better alternative to piracy, new online streaming services are showing consumers just how outdated the iTunes Store really is.

Spotify is one strong example of an iTunes killer. The stream-only service has seen its total user base double from 10 million in September 2010 to 20 million by December 2012. Even more encouraging for the service is its steady rise in paid subscribers, from roughly 2.5 million in 2010 to 5 million by the end of 2012.

But it’s not the only one. Netflix has been on fire lately, surviving a massive PR disaster in 2011 to amass 33 million subscribers. Now the company is creating its own critically acclaimed programming while resurrecting high-demand titles that TV networks failed to capitalize on, which will only draw more holdouts into its subscriber base.

Then there’s HBO Go, Hulu Plus, Amazon Instant Video, Rdio, Rhapsody, Pandora, Grooveshark, and even a Yahoo service that has seen success streaming original web programming, among others I’m sure I’ve overlooked.

And what has Apple done as these competitors have emerged? The company is rumored to be close to an agreement with Warner Music and Universal Music Group on a digital music streaming service, CNET reports. So far, though, progress on this project has not moved beyond the rumor stage.

But if and when Apple moves ahead with its own streaming service, its plans don’t seem likely to put it in a position to keep its competitors at bay. From the CNET article:

Much has been made in recent weeks of Apple trying to squeeze the labels on terms, and the deals do have Apple paying the labels a per-stream rate that's half of what Pandora pays. But CNET has learned that Apple's planned music service would offer new revenue streams as well.

That includes a quick way for consumers to buy a song they hear, potentially boosting download sales from iTunes, as well as a revenue share of new audio ads Apple is planning to add to the free service, according to sources.

On paper, Apple’s rumored approach to music streaming does have a financial upside for record labels, but, in practice, it won’t do much to retain consumers.

The supposed "quick way for consumers to buy a song they hear" is much less appealing that it sounds. Consumers who subscribe to Apple’s streaming service likely won’t be eager to pay for a song they just heard for free. Spotify’s premium users pay $10 a month to hear whatever songs they want, and they can even create offline playlists for use when they can’t access the internet. And, for that $10, they get to hear it all without listening to advertisements, which an Apple streaming service will reportedly need in order to please record labels.

By the time Apple gets a music streaming service off the ground, it may have lost too many users to competing services to really keep iTunes intact. Why would consumers stream content from iTunes when many of them already have accounts with Spotify, Netflix, and Amazon?

Remember Ping? It was a social network that Apple released in 2010, at a time when social media hype was at its peak. Ping was a good idea – give music nerds a way to connect, share, and recommend music to one another, and watch as they drive their friends to buy content they would have missed without it. The problem was that people were already using Twitter, Facebook and YouTube for that purpose. Had Apple launched Ping before users were already familiar with the social networks they had, it may not have had to discontinue the service just two years later. By waiting to develop a content streaming option, Apple may be making the same mistake.

Personally, I’ve wanted to write this column for years, and the iTunes Store’s 10th anniversary seems like a fitting time to consider all this. I’ve been paying for Spotify’s premium service since it was first made available in the U.S., and I’ve hardly used iTunes since. This all culminated last summer, with the release of Frank Ocean’s album Channel Orange. For whatever reason, I bought the album on iTunes for about $10 on the day of its release, only to see shortly afterward that my friends were listening to the album on Spotify. For $10 paid on iTunes, I got a really good 17-track album. For $10 on Spotify, I would have gotten that same album, along with access to thousands of others. It was a pretty stupid mistake that showed a pretty glaring inequity among content providers.

As NPD Group’s numbers show, a lot of other people have apparently realized this as well. As everyday consumers become more familiar with the cloud, and more smartphones come equipped with 4G LTE, the concept of owning music will seem more and more outdated.

Of course, Apple may prove me wrong and blow everyone else out of the water when it finally does get around to opening a streaming service. The company is known for its surprises, and it has surpassed expectations in the face of critics before.

But I’m not the only one saying that its grip on the digital content market is loosening. In an interview with Businessweek, Gartner VP of research Mark McGuire said the market may not have one dominant leader, and could instead be split among several competitors. With the broad range of options available today, all of which are less expensive than the iTunes Store, that seems like the most likely scenario for the next few years.

Apple may have solved a major problem with iTunes 10 years ago. Now, though, iTunes has become the problem, and its competitors have stepped up to solve it before Apple could.

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Copyright © 2013 IDG Communications, Inc.

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