High School Math 101: iTunes Sales Not Collapsing

I always enjoy Forrester's Josh Bernoff's writing and analysis, but we often don't see the same data the same ways. So when I read yesterday's New York Times quick article claiming that iPods aren't driving iTunes sales, I decided that they must have misquoted him. When I saw today's article in The Register claiming that iTunes sales are collapsing, I decided there was enough silliness being repeated over and over that I had to run some numbers myself.

The data point in question in the New York Times is from this quote:

Although both [iTunes and iPod sales] are successful, the relationship may not have worked out exactly as expected. At any given point, the cumulative number of songs sold by the iTunes store has generally been about 20 times the cumulative number of iPods sold, according to Forrester Research, the technology consulting firm. That ratio has recently crept up to roughly 22 to 1, as 1.5 billion songs have been sold. The figures were compiled from public statements by Apple.

The numbers suggest that iPods are not driving iTunes sales as much as early supporters may have expected.

click to enlarge

Three years of iTunes and iPods sales

The graph above looks at cumulative iPod and iTunes sales on a logarithmic scale. Now to review a little high school math (yes, high school was a long time ago here as well), when you plot things on a logarithmic scale, exponential growth shows up as a straight line. A gradually tailing off curve generally still implies substantial growth -- iTunes sold a billion songs just in the past 12 months. So the first takeaway from the above curves should be that both iTunes and iPod sales are growing dramatically.

Secondly, let's look at the ratio between songs and iPods. In December 2003, iTunes had sold about 25 million songs for 2 million iPods, or a ratio of about 12.5 to 1. Today, that number is more like 23. So songs per iPod have actually grown over three years. Furthermore, some of those iPods sold now are not operational (although my December 2001 first generation iPod is doing fine, not everyone is so careful or lucky), and some iPods go to repeat buyers. So the actual ratio of songs to iPods is actually higher than this graph would indicate.

The bottom line: anyone who claims iTunes sales are collapsing can't do basic math. The rate of song purchases is going to change month-to-month, and Forrester's data shows that. But the iTunes Store is the fourth largest online retailer of any type and is selling almost three million songs a day. And of course, none of that counts revenues from TV shows or movies either, each of which amount to millions of dollars of revenue per year. If that's a collapse, I don't know what these authors consider success.

Update: I have seen a few postings referencing this article saying that Josh and I are looking at the same data. We are not; he has access to some proprietary Forrester data that I don't have access to. And the numbers he has cited are averages from a sample of about 2,000 US credit card records, which may or may not be representative of the entire population of iTunes music buyers. My interpretation of his data is that the second derivative of revenue may have changed in the last few months, but as the data clearly shows, that is very very far from iTunes sales collapsing. It simply means that its growth has slowed somewhat. Nonetheless, given that Apple took nearly three years to hit a billion songs sold, and the fact that it sold a billion just in the last twelve months, iTunes music sales remain quite healthy and producing revenues of more than one billion US dollars a year.

AAPL 1-yr chart:

Disclosure: I do own a small number of Apple shares.

Comments

[Davis Freeberg:]

I think to say that Apple is bringing in a billion in revenue mischaracterizing the real success or failure of the iTunes music store. The truth is that they immedietely give a large chunk of that billion dollars to the media companies for the content and by the time they pay their bandwidth bill are left with 15 cents on the dollar. While adding 150 million in net income to the bottom line is certainly not a failure, when you look at it in the context of the 2 billion in net income that Apple brings in, it's really not all that significant. I've heard a lot of people talk about Apple as a media powerhouse, but this really isn't all that impressive given the number of iPods that they've sold. Deep down inside, they will always be a gadget company, iTunes exists so that they can make their bread and butter by selling high margin iPods. The question in my mind is whether the success of their iPod is really all that sustainable. We've seen fads come and go and while there is no doubt Apple will sell these babies like hotcakes this holiday season, if you would have look at this market twenty years ago you would have said that Sony's Walkman was going to dominate forever. In the end, $150 million in revenue is impressive and what the strategic relationship contributes to gadget sales is important, but deep down inside Apple will always have to keep selling hardware and I doubt that iTunes will ever turn out to be the annuity stream that many investors think that it will be. Considering that the cable companies make twice as much in one month, that iTunes makes over the life of an iPod owner, I'd question how you are defining success and failure for this business model.

2006 Dec 12 10:06 PM