Micropayments Redux at the iTunes Music Store
I've been playing with the new Apple iTunes Music Store with my Mac OS X iBook—including buying some new (actually, old) music! In addition to rediscovering some favorite songs, I'm also exploring how Apple has tackled the micropayments problem using old-fashioned credit cards.
First Impressions are Lasting Impressions
During my first session of playing with iTunes right after downloading the upgrade, I fell victim to Apple's recommendation engine—you know, others who liked this particular artist also bought x, y and z. In my case, I somehow ended up at the Everly Brothers aisle in the store—like a lot of times on the Web, you can't recall how you got there but there you are. After listening to a couple 30-second cuts of that oh-so-sweet Everly Brothers harmony, I bought a few of their old songs for 99 cents a track. 1-Click and they're here. I can listen to them as many times as I want, move them around my local home network, and burn them into my own CDs. Very cool. I may have those Everly Brothers CDs somewhere around the house but a) I can't find them quickly and b) it takes me longer to rip the songs off the CDs than downloading the tracks from the Music Store. Like most consumers, I'm willing to pay a fair price for convenience!
The iTunes Music Store doesn't have every song ever recorded—it is missing a number of major recording artists, as well as many emerging talents—but with over 200,000 songs from the world's 5 largest recording labels, Apple's catalog is comparable to other online music catalogs and complete enough that I could find much of the music I like.
I also wasn't bothered by Apple's approach to "digital rights management" of my purchased content. It's so lightweight as to be perceived as not even being there for honest folks who simply can't be bothered with trying to share music over peer-to-peer file sharing networks. I can mix and match my downloaded music tracks into an infinite variety of playlists and effectively burn as many CD's as I want. It's a near perfect tradeoff of protection for the music industry while giving me the freedom and convenience I need with my music.
Apparently, there are lots of other Mac users just like me. Apple issued a press release about success the iTunes Music Store during its first week of production. It that week, the Store sold over 1 million songs with over half of the songs sold being sold in bundles called albums. A little later, Apple announced over two million songs had been purchased over the sixteen days since the Store debuted online. Once again, over half of the songs purchased were purchased as albums. Apple says these album sales help demonstrate to the music industry that individual per-track song sales won't seriously undermine album sales.
What's behind this success? In my mind, it's not any one component so much as it is the combination of:
- Adequate catalog. Large enough to carry something that meets everyone's personal tastes (just like the local music shop.)
- Full quality sampling. A 30 second preview of what you're buying before you buy it.
- Per track or per album sales model. Doesn't require a subscription or long-term financial commitment (just like real life.)
- Lightweight rights management. Gives consumers the flexibility to legally use the music they buy (just as if they bought the physical CD.)
- One-click purchasing. Complete simplicity, as licensed from Amazon.
While Apple didn't invent downloadable premium music, the company understands the importance of offering convenience and a truly great consumer experience. And I appreciate being treated like a music fan—not a potential criminal.
Deconstructing the Model
But is there a business here? Let's do the math on the Store's early success. If we say that an average album has 10 tracks and that 1,000,000 of the 2,000,000 songs sold were in albums, then there were about 100,000 album purchases since the Store opened. That leaves 1,000,000 individual song purchases.
The 100,000 album purchases should generate roughly $1,000,000 in revenues for Apple. Likewise, the 1,000,000 individual songs generate about an equivalent amount of revenue. For a total of $2 million in revenues for Apple from the Music Store's first sixteen days in business—for an average gross revenue of $125,000 per day.
Interestingly, Apple's average sale amount would be $2 million divided by 1,100,000 or about $1.82 with the distribution being totally bi-modal around $10 and $1. That's except for one other factor: Apple's Music Store fine print says purchases may aggregated within a 24-hour period so that they're posted to your credit card account as a total for the period, not as individual song purchases. This technique helps drive the actual average ticket amount much higher. For example, in my personal case, I bought one track on Monday for $0.99 and 5 tracks on Friday for $4.95 for an average of $2.97.
So, what starts out looking like a micropayments transaction at 99 cents per track, actually beefs itself up because of this smart daily aggregation of purchases. As a result, the fees Apple pays for its Music Store credit card processing are actually a much smaller percentage of the sale amount that it might at first appear.
Most credit card merchants pay their merchant acquiring bank a combination of a per transaction fee plus a percentage of the purchase amount. As an example, let's say Apple's merchant agreement for bankcard acceptance is priced at 2.2% plus 15 cents per transaction. On a 99-cent purchase, those fees would total 17.2 cents or 17.4% of the purchase amount. On my 5-track day, my $4.95 aggregated purchase cost Apple 26 cents or 5.3% of the purchase amount.
Of course, as a consumer, I could care less what it cost Apple to process these payments. While some in the payment industry may have angst about the costs associated with handling small purchase amounts, consumers know that the system just works and, when something as convenient as the Apple iTunes Music Store is the merchant, small purchase amounts work just fine.
Future Prospects
How big a business might the iTunes Music Store become? It's already running at roughly a $50 MM revenue/year run rate coming out of the gate. And this is only from the small community of Mac enthusiasts like me who just have to play with almost everything Apple does. Let's say that opening the Music Store up to Windows customers adds 10X the volume—that would drive annual revenues into the $500 MM range, perhaps higher.
While some analysts have questioned the relevance of iTunes to Apple's bottom line, I believe the upside is substantial. As a standalone business, the market capitalization of iTunes might be $1 to $2.5 billion depending on a potential investor's view of the likely growth rate. Not bad for an online business that didn't even exist a month ago.
Break On Through To The Other Side
Although the iTunes Music Store is off to a strong start, it's easy to see why music industry executives see the Store as an experiment. Extending platform coverage to Windows users is a given and will drive purchases to the next level. But to maximize the Store's full economic potential, Apple will need to push hard on a number of fronts:
- Catalog size. With some notable additions—and some high-visibility exclusive tracks—the Apple catalog is still more or less comparable to other online music sites. While 200,000 plus tracks might sound comprehensive, there are actually over 20,000,000 tracks listed in the full CDDB (Compact Disk Database). Apple needs to strive for full catalog coverage. Would Amazon have been successful if it came out of the gate with only 1% of the books in print for sale?
- Age restrictions. By restricting purchases to individuals 18 years and older, Apple is blocking an important demographic segment of the music buying public. Indeed, until Apple opens up the Store for teens, the peer-to-peer file sharing services are likely to remain the dominant sources of music. Apple would be wise to explore co-marketing arrangements with RocketCash, Visa Buxx, and other teen-oriented payment providers.
- Market coverage. With 60% of the worldwide spending on music done outside the U.S., Apple needs to open up the Store to exploit the full reach of the Internet. We suspect that a more international audience will demand a more comprehensive catalog.
- Features. While song-specific recommendations (based on what others have purchased) are a great start, there is so much more that Apple can do to drive sales. Beyond recommendations based on aggregate downloads, Apple could use branded playlists to drive purchases. In addition to searching by artist, albums, composers, and songs, extreme fans will want to browse and search by their favorite producer, vocalist, or supporting musician.
Has Apple broken the code on micropayments? Yes and no. The success of the Store demonstrates that there is a broad market for premium content—sold ala Carte, immediately accessible, and fairly priced. In this sense, the Apple iTunes Music Store is the best micropayments proof point to date. Its success should encourage others to pursue similar models or to provide a cross-merchant micropayments infrastructure. The door is wide open.
Publication History
Initial Publication Date: May 27, 2003
