NPD Group Blog » Apple Won’t Fall Far From The Tree

Apple Won’t Fall Far From The Tree

Tuesday, April 7th, 2009
By Russ Crupnick, Vice President, Senior Industry Analyst

Apple is announcing perhaps the most significant change in iTunes since the company began to offer video downloads several years ago. Today Apple will unlock the digital rights management (DRM) protections that place certain limits on copying and interoperability of music purchased through iTunes. Apple also plans to improve the quality of its music files, and it will also add variable pricing for songs.

According to NPD’s consumer music tracking studies, Apple users are, for the most, part oblivious to the DRM, because most can burn media files enough times for use in their home or car CD player, plus the tracks work seamlessly on Apple’s iPods, which remain the top-selling media player brand in the U.S. In essence, for Apple users DRM means “Doesn’t Really Matter.” Better sound quality is a bonus, though — and while it’s difficult to distinguish on a portable player, it’s certainly noticeable on home stereos and other devices.

Pricing, though, is always a controversial area for consumers. Apple was ingenious in using flat 99-cent pricing to introduce iTunes in 2003, because digital music was relatively new and there was no chance of consumer confusion. The $.99 per track was a fair price when compared to equivalent per-song costs on CDs and at $9.99 iTunes albums cost less than the average CD. Although most song tracks will still be priced at 99 cents, iTunes’ new variable pricing model also offers songs for $1.29 and 69 cents. The latest tracks from popular artists will tend to cost more, and older catalog titles will often cost less.

There are lingering worries that switching to variable pricing might cause consumers to migrate from iTunes, in favor of AmazonMP3, or perhaps they will stop purchasing paid digital music altogether. I predict that Apple will, at least in the near term, hold on to its customer base and possibly even increase revenue from song downloads.

Thanks to the primacy of the iPod, iTunes continues to boast an overwhelming share of digital music sales. Customers are pleased with the Apple ecosystem — and $1.29 is not an outrageous price to pay for a must-have song track, especially when you can offset that premium cost by downloading other songs by the same artist or within the same genre for less.

Apple has still more aces up their sleeves. Most music that consumers load on their iPods doesn’t come from iTunes; it comes from their own music collections — from borrowed or purchased CDs, and for some from peer-to-peer (P2P) file sharing sites. What’s important is that the overwhelming software choice for managing all of that content is iTunes. Regardless of whether a consumer has ever actually purchased a music download, most digital music consumers still likely manage their music libraries using iTunes. And very few will switch to something else, because iTunes works very well as a music management tool.

The genius behind Apple isn’t just its iTunes Music Store, or its selection of TV shows, or the ubiquitous iPod — It’s the iTunes Gift Card. Over 40 percent of recent digital music purchases have been with gift cards, and the vast majority of gift-card purchases link to iTunes. It’s not uncommon to see nearly two-thirds of teen iTunes purchases source to a gift card. And, let’s face it, many consumers look at the face value of the gift card, rather than the cost of each song they’re purchasing. These cards are more common than CDs these days, and they are a powerful customer loyalty tool.

My bet is that Apple will hold onto its customers and any early grumbling about prices will be short-lived. Too many aspects of the iTunes/iPod digital music model are bullet proof, at least for the time being. The trend we’ll be watching is whether the new tracks at a premium price coupled with ‘bargain” catalog will have the desired effect of improving the overall spend of digital music buyers.

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