John Gillilan has hundreds of Pepsi caps lined up in rows in his University of Southern California freshman dorm room, each one representing a song downloaded from Apple's iTunes Music Store.
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Apple Computer's iTunes Music store was launched one year ago, and Apple is now the leading distributor of online music by far.
Apple's launch has spawned numerous imitators and changed the way the recording industry views electronic distribution. Rather than being distrustful, as they were during Napster's heyday, the record labels now consider legal downloads a way to fight piracy and to tap a large and rapidly growing market.
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A Macintosh user and avid music fan, he started buying music from the store when it launched a year ago. This year Gillilan realized he could apply much of his $2,500 college dorm food allowance to purchasing bottles of Pepsi and taking advantage of Pepsi's iTunes song-giveaway promotion, he said.
The 18-year-old Gillilan might be a little more single-minded than most iTunes fans, but as a music major and recording
engineer he sees the success of online digital distribution--today best evidenced by iTunes' sales--as a harbinger of his own future.
"Obviously the record industry has been reluctant, but
it's crazy how
much has actually happened (this year)," he said. "My
career at this
point realistically is going to depend on how
successful this business
Gillilan isn't alone in looking at iTunes as an
Launched a year ago Wednesday with a
blaze of publicity, the service effectively
kick-started a languishing
digital music business.
Over the next year, Sony, Microsoft and Virgin all
are aiming at the market. Yahoo is expected to throw
its hat into the ring, and AOL may open its own store,
instead of pointing its subscribers to iTunes as it
Even the major record labels are excited--a dramatic reversal for an industry that had
previously seen Internet downloads as a threat to
their business, rather than an opportunity for growth.
For the two years leading up to Apple's launch,
attention had been
focused on Napster, Kazaa and other file-swapping
services that were
allowing billions of songs a month to be downloaded
record labels, stung by falling revenue, focused much
of their attention on filing lawsuits, drawing charges
that their main interest was to smother development of
the digital music business.
"iTunes has been incredibly valuable," said Larry
of Universal Music's eLabs division. "It has changed
the debate, changed
the buzz, changed people talking about record
companies putting up a
wall" against digital music.
But as the so far unchallenged market leader, Apple
has established several other market realities
against which various rivals
chafe. The company's iTunes service is so tightly integrated with its
that songs bought through the store can only be easily played
on Apple's iPod,
not other MP3 players. The close integration also
means Apple can
afford what it openly concedes are miniscule profit
margins on the store
itself, seeing it as a way to drive iPod sales.
Although Apple has taken a largely proprietary
approach to iTunes, it made one major concession by
making its software compatible with Microsoft's
Windows operating system, effectively untying the iPod
from the Mac in hopes of tapping into the much larger
market for Windows PC users. The company has also
struck a deal under which Hewlett-Packard will sell PCs with iTunes preloaded and also sell HP-branded iPods.
The most public overtures when it comes to opening the iPod have come from
Chief Executive Officer Rob Glaser, who--not long
after comparing Apple's closed technology doors to a Soviet grocery store--found his own private
appeal to Apple CEO
Steve Jobs rejected.
Jobs says he sees little reason to open up to rivals,
"To be honest, it's just not worth it," Jobs said at
Apple shareholder meeting. "It
doesn't make any business sense."
However, record company executives are quietly
advocating industry cooperation, contending digital
balkanization will be bad for business over the long
"Interoperability is critical," said EMI Music Senior
Vice President Ted Cohen. "We need to get to that
point, and people need to work together to do it."
Just getting started
Despite Apple's success, the digital music business is
only beginning to get off the ground, and it's hard to
predict what might happen next. The iTunes launch was
seen by many in the record industry as an experiment
with loosening previous restrictions on digital files.
Now that the first stages of the experiment have
proven successful, labels may be amenable to further
Some of that variability will come in prices. Apple's
99 cent price for single songs and $9.99 price tag
for albums has been widely copied. But already that's
beginning to change, with some record executives
saying they're eager to test tiered
A little of this is already evident on iTunes.
Singles have remained steady at 99 cents, but a few albums
have begun creeping upward. Aerosmith's newest was
priced at $11.99 last week, while rock-guitar virtuoso Joe Satriani's new release was $14.99,
Apple declined to comment for this story, but other
services said they
had already seen labels raise prices on some
individual songs as well
as albums. None has passed on those per-song price
increases yet, citing a
continued need to present consumers with the simplest
Label and Web company executives said the price increases
experimentation with tiered pricing that mimics the
way retail album
prices fluctuate according to title, and over time. Under
pre-release singles or very popular artists might cost
$1.50 or more
per song, average tracks might stay at 99 cents, and
back catalog and other
promotional songs or albums could drop even lower, for
"It is a good thing to have that experimentation, both
up and down,"
said Sean Ryan, RealNetworks vice president for music
because everyone went out at 99 cents doesn't mean
that's always the
Labels are sensitive to charges that they want to
charge more online
than for CD sales, however.
"We've built in a lot of flexibility," said EMI Group
Jeanne Meyer. "There are tiered prices (for wholesale
digital tracks), but
they're all lower than in the physical world."
With that experimentation in pricing may come some
fluctuation in usage
rules. Currently iTunes customers can use their
purchased music on up
to three computers and burn the same songs in the same
order up to 10
times. However, those rules may be tweaked as the
renegotiate their contracts with Apple.
Other companies, if not Apple itself, are likely to
more with subscription services as well. Jobs has
dismissed these as
virtually irrelevant, saying that people want to "own,
not rent" their
For the most part, these have remained niche products,
RealNetworks has said it now has a total of more than
subscribers to either its unlimited Rhapsody product
or a cheaper
online radio service. But for companies that do not
have an iPod-like hardware
device to depend on for profits, this monthly stream
of revenue looks
far more appealing, and will likely drive more
Microsoft is also hoping to make such services more
attractive through technology, code-named Janus, that would
allow subscription music to be transferred to portable
devices--a key drawback to the current crop of
Though Apple has been the undisputed leader in the
market--and has done better than some would have
thought a year ago--online downloads still
represent a small part of how people get their music.
services continue to be popular, and CD sales have
started to show some
signs of life. Apple itself had predicted it would
million songs by the time the one-year anniversary
rolled around, a goal
the company seems likely to miss.
To date, rivals
like Napster and Musicmatch have fallen far short of
According to the NPD Group, Walmart.com's cut-rate
pricing has come
closest, drawing about half the number of customers
seen by iTunes in
Analysts say that although many of the new entrants to
the market could
pose strong competition, Apple will continue to
benefit from the fact it
has sold so many iPods--devices that work only with
Last quarter Apple sold 800,000 of the portable music
rivals such as Dell and Samsung selling only a
fraction of that total.
"Apple set the bar incredibly high," said Mike
McGuire, an analyst with
GartnerG2, a division of the Gartner research group.
But some rivals said they expect Apple's dominance
will be temporary.
"Apple is probably still riding the wave of their
initial launch," said Jason Reindorp, a group manager
in Microsoft's Windows digital media unit. "They have
spent an inordinate amount of money to generate
awareness around their closed ecosystem. (But) as
people get more sophisticated in this area they are
going to be getting more frustrated with a closed
ecosystem. I think the market will kind of
self-correct as things get more mainstream."