Amazon Gaining Share on iTunes

By leading the way on DRM-free downloads, and on the strength of a joint promotion with Pepsi, (PEP), Amazon (AMZN) is apparently gaining share on Apple’s (AAPL) iTunes store.

CNET quotes NPD as saying that in 2008, 87% of US digital music buyers used iTunes and 16% used Amazon (I would have expected more overlap).

Some 18 months after launching, Amazon is now in a credible 2nd place, at least in the US market. It appears — as the Big Four labels intended — that Amazon is having more impact on Apple than I had assumed.

Both Apple and now Amazon and Wal-Mart (WMT) will be charging more (as labels long demanded) for current, more popular titles.

However, PaidContent (great site) has some news that has to be worrying for Apple’s rivals. Citing a Piper Jaffray report, Joseph Tartakoff writes:

…a new report from Piper Jaffray says that iTunes is now essentially the only option teens consider. Forty percent of high school students in the investment research firm’s bi-annual teen survey legally purchased music online. Of those, 97 percent said they used iTunes, up from 81 percent a year ago. Piper Jaffray attributes the growth in large part to slowing momentum from newer competitors, like Rhapsody, eMusic and Amazon MP3.

The way I read this:

• Amazon is cross-selling MP3 files to its core customer base — people in their 30s and 40s who saw Amazon as breakthrough technology when it came out during the dot-com era.
• Apple has a lock on selling trendy iPods to the affluent teen market where parents out of guilt pay for their kids’ legal downloads.
• Kids whose parents won’t pay for downloads are using second-tier players and bootlegging music.

This is a really odd business relationship. On the one hand, Apple gives the labels exactly what they want: creating a new market that gives people a chance to buy legal downloads, and perhaps prevent an entire generation (just most of it) from thinking digital music is free music. The labels repay it by encouraging rivals like Amazon to Apple to put pressure on it.

In turn, Apple complains bitterly to the public and regulators that the big bad labels made it use DRM. When the labels help Apple’s rivals go DRM free, then it uses that precedent to ditch DRM too, enabling the same music copying problems the labels vowed to prevent.

I would say that’s just business, but this is a particularly thorny problem for which there is no good answer. Or perhaps we just have a test of wills between the one and only Steve Jobs-sized ego against Hollywood-sized egos (which are pretty big too).

Comments

[marv08:]

"When the labels help Apple’s rivals go DRM free, then it uses that precedent to ditch DRM too, enabling the same music copying problems the labels vowed to prevent."

Well, your picture is a bit flawed here. DRM did never work, it only made purchases less useful for those that do pay; even the newest protection technologies for Blu-Ray media do not even stop a 10 year old child. People have always been sharing music, no matter if on audio tape, DAT tape, CDs... and that was the best viral marketing the record industry ever had. Far more than 60% of the bands and individual artists legally sitting on my CD shelf would have not received a Cent from me, if nobody would have introduced me to them by lending out CDs or taping compilations. They may have Tinseltown-sized egos, but not the brains to go along with them.

Also, I am deep in my 40s, and I am an Amazon customer for hardware, books and DVDs/BDs, but I buy all my music from iTunes for two simple reasons: better experience (background info and professional reviews for most titles, many albums with extras, e.g. booklets or videos, possibility to "complete albums" after buying single tracks, gorgeous user interface) and great customer service (I once lost the computer hard disk and my backup simultaneously due to a power surge – one email to iTunes support and a re-download of all my music, audiobooks and TV shows, roughly a 5k value, was authorized – not a Cent lost... try that with Walmart or Amazon and have fun.

Apr 10 12:20 AM

[anti-cranky:]

I found a lot of value in using music, in the form of a digital file, to be useful for teaching my kids about Intellectual property and its value. Paying for music should not be about “parental guilt”. It’s something I was able to teach my kids as soon as they started using ipods and they “get it”.

Speaking of the generational differences… my kids use iTunes almost exclusively. I still prefer to get the actual CD from Amazon since I’m getting the music in a lossless format. If I do buy compressed music I prefer Amazon because I can get a 256kb encoding rather than the 128kb encoding itunes offers. I wish there was a service that offered lossless formats for those of us (few) that care…

Apr 10 01:04 AM

[zapt:]

I don't see in your article where Amazon is gaining share. Don't you need TWO sets of numbers showing their shares at time A and time B?

Apr 10 01:09 AM

[marv08:]

@anti-cranky: You are not up-to-date on this one. All tracks on iTunes are now 256 kbps CBR AAC and therefore actually better than the 256 kbps VBR MP3s on Amazon.

Apr 10 01:30 AM

[Zobby:]

Some reports say that the music companies sell music to Amazon at much lower prices than they do for Apple to try to dilute Apple's hold. Even now many of the songs sold at 1.29 on Apple is only 99 on Amazon. Computerworld says that Amazon gets prices so low they can sell it for less than what the music labels offer Apple. Computerworld adds tongue-cheek that Apple might as well buy its music from Amazon! But amazing enough even with the scales weighted against it Apple is so good at giving a good user experience that it still holds such a lead over Amazon. We'll have to wait and see if the music labels become fairer towards Apple now that music labels got their variable pricing model.

Apr 10 01:58 AM

[jmmx:]

"When the labels help Apple’s rivals go DRM free, then it uses that precedent to ditch DRM too, enabling the same music copying problems the labels vowed to prevent."

This needs to be placed into historical perspective. It seems that 6 years ago is hardly historical - but it seems no one remembers that far back.

Before the iTunes store in 2003, there was a crisis in the music industry (at least from their view). People were copying music and illegally sharing or even selling it. There were no legal online stores for most music (if any at all). Apple came into this and said "We will sell your music for you online." The studios wanted nothing to do with it, but finally conceded for 2 reasons:

1- Apple gave them DRM that "guaranteed" them some reasonable copy protection, and
2- They really had only one choice: Sell online downloads or have the public download for free.

As time went on, the studios learned that DRM was annoying to the customers, and not really protecting anything since those who wanted to rip would do it anyway.

It took a while for them to come to this realization as the industry slowly played with the idea in various venues. Now - if you are going to make a change that will possibly open you up to huge losses, and the change is going to be irreversible, then you are NOT going to start with your biggest merchant. This provides a more logical explanation as to why Apple was late coming to all DRM-free music.

Do you think Apple cares about DRM? They are now saving millions by not having to deal with it.

Apr 10 07:37 AM

[vassar:]

If you're old enough to have kids, you probably can not hear the difference!

PS: If you knew what you were talking about, you would realize that AAC is better than MP3.

On Apr 10 01:04 AM anti-cranky wrote:

> Speaking of the generational differences… my kids use iTunes almost
> exclusively. I still prefer to get the actual CD from Amazon since
> I’m getting the music in a lossless format. If I do buy compressed
> music I prefer Amazon because I can get a 256kb encoding rather than
> the 128kb encoding itunes offers. I wish there was a service that
> offered lossless formats for those of us (few) that care…

Apr 10 09:36 AM

[brewer:]

Apple wasn't late to DRM free music, they were the first to push for it. Also, the DRM on iTunes was so successful because it was hardly even noticeable. You could still share the music, just not post it for everyone to dl for nothing. It's the least intrusive DRM ever made, really. This matches Apple's approach on the Mac, hardly any of their software has any sort of registration process. For instance, Mac OS X itself.

And yes, AAC downloads on iTunes are far bette than Amazon which is still using MP3s. Anyone that thinks they are getting a better quality experience on Amazon is seriously deluded.

Apr 10 09:55 AM

[sleepy:]

Joel, I really think you have got this back to front. DRM over which Apple has absolute control, even if/when it is cracked by hackers, is what enabled Apple to negotiate at the outset very flexible terms of use for iTunes downloads that match CD terms of use, and allow an iPod to continue playing DRM'd music in perpetuity without being "re-authorized" regularly by a global DRM mother ship. Everyone else offered the end user a horrible deal and their download services have successively folded, usually leaving customers with nothing. The labels so desperately want music sold through other channels than iTunes that they almost certainly directly breached a "most favored nation" contract clause, making Apple wait over a year before being allowed to match Amazon's DRM free terms of use that the labels gave in a last ditch attempt to stay relevant to music distribution. (In fact, Steve Jobs lost his patience with their delaying tactics after a year: “They’re trying to create a competitor to iTunes by denying us D.R.M.-free music”)

Apr 10 10:20 AM

[martyg:]

it's just a question of time as to 'when' not 'if' that amazon's prices and apple's prices close the gap to virtually zero. then the purchasing experience will rely on delivery and content.

Apr 10 10:22 AM

[Homer II:]

All you clucks who purchase media content from anywhere are fools. There are electronic sources all around you for music, video, anything else, which can be had by a F R E E download, no questions asked. And, don't try laying a guilt trip upon me for IP theft.. those DRM turds who steal from the authors of the media are your true thieves

Apr 10 04:27 PM

[guliamo:]

There's no doubt that on-line music is in it's infancy. I think market share doesn't matter at this point as 95% of music downloaded is still being done illegally.
Apple's ditching DRM was a good move.

Apr 11 06:47 AM

[KenC:]

Wow, weird, that was just weird. I clicked your link to Apple's "complain[ing] bitterly" story, and instead I get another one of your blogposts. Nowhere did I see Apple's "complain[ing] bitterly".

Is this just in your mind? Where is the info on Amazon "gaining share" on iTunes. Are you gonna blame the copy editor?

The obvious place to show Amazon "gaining share" is when you cite the NPD stats for 2008, where Apple has 87%, and Amazon 16%. What was it in 2007? Duh! Make a logical argument PLEASE!

Apr 12 06:23 PM