The iTunes Store turns 10: It's Apple's empire to lose

Apple's iTunes Store heads into its second decade on top -- and facing threats like it's never had before.

Apple CEO Steve Jobs announces the expansion of the iTunes Store to the U.K. and other parts of Europe in mid-2004.
Apple CEO Steve Jobs announces the expansion of the iTunes Store to the U.K. and other parts of Europe in mid-2004. Getty Images

THE SPRING OF 2003. Apple was still in the early stages of what became one of the biggest comebacks in the history of business. Steve Jobs, who had returned to the company six years earlier, had already taken bold steps: He had killed off product lines, won Apple great attention with its colorful iMacs, and begun to open retail stores that -- given the lousy, post-tech bubble economy -- seemed like a crazy idea.

Yet sales of personal computers -- and the Mac was Apple's mainstay product -- weren't budging. It was a Windows world, and it sure looked like it would stay that way.

Apple did have one unlikely bright spot: the iPod. When Apple released the product in late 2001, the skeptics had a field day. At $399, the device was more than twice the price of most portable CD players, and required a Mac to load it with music. But consumers didn't care what the experts thought. They wanted in. The iTunes Software worked seamlessly -- with iTunes on the Mac and on the iPod -- and sales took off. People even bought Macs just so they could begin ripping their CD collections and stuffing them in their pockets.

Jobs wanted more. He began angling for ways to sell the very thing that was fueling iPod sales, the music itself. The opportunity even showed itself in obvious ways: When Apple sent the first batch of iPods to press to review in 2001, it spent $50,000 on CDs for reviewers rip to their computers.

Where that led, of course, was to the creation of the iTunes Store, a decision that would shake up two industries and create a fortune for Apple. Much has changed since and so has the iTunes Store, which turns 10 this weekend. It shouldn't even be called iTunes since today it sells books, TV shows, movies and apps and now claims 500 million people as customers.

As such, it's become critical to every part of Apple's business, the thing that fuels sales of iPhones and iPads. It has also become Apple's fourth largest division, just behind the once flat-Mac, and in this last quarter alone accounted for $2.4 billion of the $4.1 billion Apple's iTunes and software services brought in. Were the iTunes business unit a standalone company, it would bring in more than three times the revenue Yahoo posted during all of 2012.

Yet as the iTunes Store enters its adolescence under CEO Tim Cook, its position is anything but guaranteed. Rivals -- from Amazon to Google -- are trying harder than ever, and small competitors such as Spotify and Pandora are angling to pull away its customers. Among Apple's many issues right now is how to keep iTunes on top when so many are determined to weaken its digital stranglehold.

Apple didn't get there overnight
When the iTunes Store debuted, Apple's market share in personal computers was stuck at two percent worldwide. Despite Jobs' smooth salesmanship, he struggled to get retailers to stock his computers, and he an even harder time wooing shoppers from cheaper rivals from the likes of Dell and HP.

The nascent world of MP3 players and online music stores, by contrast, was disjointed and wide open. When the first iPod came out, MP3 player heavyweights like Creative Labs -- which had made a name for itself building sound cards for computers -- had only been in the MP3 player market for about two years. And, importantly, no rival had figured out the software part, let alone created a place to buy music that had full-on support from the labels.

Shoppers buying the first crop of iPods in 2001.
Shoppers buying the first crop of iPods in 2001. Getty Images

Apple used its small size, and hardware-plus-software approach to pitch record label execs on making a deal that would fill this gap, combat piracy, and let Apple sell their music. The proposal was simple: if it flamed out, the risk was small because Apple was small. And if it did well, both groups could show everyone else that selling digital music could work.

"We used our small market share to our advantage by arguing that if the store turned out to be destructive it wouldn't destroy the entire universe," Jobs said in Walter Isaacson's 2011 biography .

Apple got Warner Music -- the first of the big five record labels -- on board, then began shopping the idea around to the rest. The big victory came when Jobs and team convinced Sony, which had its own MP3 players and digital music store called Pressplay, to make its library available through Apple's store.

Launch and success
Just three months after launching its iTunes software, and updating just about every product and service at the annual Macworld conference, Jobs and company called the press back to unveil the store.

At the time, of course, the most popular way to get digital music files was to steal them -- and Apple took plenty of criticism for enabling, even encouraging, the practice. At the unveiling, Jobs took piracy to task, but his argument was that peer-to-peer music networks offered lousy quality and were slow to use. At one point, Jobs even suggested that it took so long to find a handful of songs that you could save money by simply buying them from Apple.

The store started with 200,000 songs at 99 cents a pop, a library that's since ballooned to more than 35 million tracks worldwide. However, from the beginning the big deal was not just the library, but also the way you could browse and buy those tracks. Apple offered previews of the songs, and shoppers could buy individual tracks instead of entire albums -- music was theirs forever.

"At this very moment, executives at Pressplay, MusicNet and their ilk are surely sprinting into hastily assembled meetings to discuss how they can mimic Apple's model," New York Times tech pundit David Pogue gushed at the time. "But that's all right; Apple will surely find other messy, dysfunctional institutions to reinvent. Do you suppose Mr. Jobs has seen the federal tax code lately?"

The iTunes Store sold one million songs in its first week. Six months later, Apple upped the game considerably, bringing the store over to Windows users. "It really was a turn in the whole of Apple's fortunes that occurred that day," says Charlie Wolf, an analyst with Needham & Company who has been covering Apple for two decades. "By migrating iTunes to Windows, Apple increased its target market twentyfold."

Song sales on iTunes for the past decade.
Song sales on iTunes for the past decade. CNET

With each new product, the iPhone and then the iPad, Apple has added new digital offerings, all of which flow through iTunes. Apple, much to the dismay of some, has become both a gatekeeper and a tastemaker.

Just how dominant is the iTunes store? According to a pair of studies by the NPD Group, 8 out of 10 songs purchased in the last three months of 2012 were from iTunes, and Apple claims a 63 percent share of the paid music download market. It's a similar story with video content like movies and TV shows, where Apple rakes in 45 percent of online movie rentals, and 65 and 67 percent of all movie and TV show purchases, respectively.

"While worthy competitors have come along, no other retailer has so thoroughly dominated its core entertainment product categories for so long," says Russ Crupnick, an analyst with the NPD Group.

New challengers, challenges
Even with Apple well on top, rivals have found new ways to lure customers away by taking a page out of Apple's own playbook. Key among them is Amazon, which had its own iPod and iTunes-like success with the Kindle, it's e-book reader. Like the iPod, Amazon made the hardware and the software, and hooked it all up to its online bookstore, which remains the top e-book store with nearly half of the market. The company's taken that same idea to its own line of tablets running a special version of Google's Android, and is reportedly working on a smartphone.

Microsoft, whose then-CEO Bill Gates fumed over the news of Apple's digital store, has bolstered its own digital stores after a series of missteps. That includes shipping software stores on its phones and computers, and more recently revamping (once again) its digital music store that's the same on the Xbox, Windows computers, and its smartphones. That's a very different approach from previous, disjointed efforts.

Google's Play store sells everything under one roof, just like Apple.
Google's Play store sells everything under one roof, just like Apple. James Martin/CNET

Last, although most importantly, there's Google with its Play store. It comes pre-installed as part of Android and sells apps, music, books, and videos. By NPD's estimates, the store isn't even on the radar when it comes to music or video content, but it's a different story in smartphone apps, where Apple was an early mover. The two stores now have a staggeringly large library of software. And while Android is frequently not the first to get big new apps or games, Google's differentiated itself with rules and requirements that are less stringent than Apple's, including the option for users to install software stores from other companies, including Amazon .

On top of all this, there's a growing number of ways people are getting their digital goods. Take streaming music services, from companies like Pandora, Spotify, RDIO and Deezer that give people unlimited access to music. Several have come up with both free and paid subscription services that have some customers spending more per year than they ever did when purchasing digital music. Apple's taken notice, and is working on a Pandora rival of its own, though it's not expected to arrive until this summer , at earliest.

Perhaps the biggest threat from these services is that they're on platforms that aren't Apple's. Where the stores from Google, Amazon and Microsoft play more into locking a user into a particular system, services like Spotify for music, and Netflix for films, have focused on letting you access that from anywhere, on any device, and in some cases buying from someone other than Apple. Between that, and the rise of Android, which is now sold on the majority of smartphones and more than 40 percent of tablets according to IDC, the draw and necessity for iTunes seems less vital.

As the iTunes Store enters its next decade, Apple's up against a simple challenge that it's no longer the only, or even the best place to go to get a content fix. That said, Apple has proven a crafty company when it comes to survival. That not only includes coming back from the brink of bankruptcy in 1997, but also fending off what's become a huge list of products from rivals dubbed iPod-, iPhone- and iPad- "killers."

For Apple to stay on top, then, might require what the company did best under its late co-founder, the master of creating and recreating product categories that expanded the Apple empire. There's certainly no shortage of speculation that Cook and company will try to keep that streak running with a high tech watch and a TV set , both of which would no doubt have iTunes Store at their very core.

 

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