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document
iTunes Stands Up to the Music Industry
By This Group Is Mandatory
Elizabeth Walker, Amanda Paradis, Erin Kelly, and Jasper Turcotte

The biggest thorn in the music industry’s side is piracy of digital music.  Despite their best efforts of shutting down peer-to-peer programs and suing those who share this illegal music, piracy still runs rampant.  But out of this time of massive downloading of free, illegal music, one legitimate way of obtaining music is surprisingly dominant.  Selling 70 million songs in its first year, Apple’s iTunes has made paying for music popular, and netted the music industry a goodly sum in return.  But is this too much of a good thing?

On May 5, 2003, Apple launched the iTunes Music Store, and it promptly sold 1 million songs on its first week.  Priced at 99 cents each, it was the common consensus  that Apple had come across a groundbreaking idea.  Roger Ames, the chairman and CEO of Warner Music Group, agrees.  “Apple has shown music fans, artists and the music industry as a whole that there really is a successful and easy way of legally distributing music over the internet.”  
But how did a music industry that was dead set on stopping digital music in favor of CDs finally warm up to the idea?



“The Digital Music Revolution,” as Apple calls it, came amongst a time when illegal file sharing and burning CDs was rampant and peer-to-peer file sharing companies like Napster were being taken to court – yet amongst this mess, people began to question how bad file sharing could be.  People theorized that it was the rising price of CDs that made file sharing so popular, while the music industry blamed file sharing for the rising price of CDs.  No matter how much they disagreed, one fact was for certain – music downloads were rising, and CD sales were falling.  Given the immense popularity of digital downloads, how could the music industry not try to take advantage of it?
The reasons behind iTune’s popularity were all the uses it had to offer.  It allowed the buyer to find their favorite music among the collection of 700,000 songs, or experience new music for what could be considered a nominal fee.  The download was quick, and the files were smaller than mp3s, allowing the user to store more.  These songs could also be played on up to three other Mac computers, and be used in applications such as iPhoto, iDVD, and iMovie.  iTunes continues to be hugely successful more than two years after its release, selling millions of songs a week.  It only seems natural that when a profit is being made, businesses will want more.

Apple and Warner Music Group are now in conflict.  While the $0.99 downloads have spurred large success for iPod and iTunes, the music industry wants different.  Every song is created differently, and costs varying amounts to produce, yet iTune’s pricing doesn’t reflect this.  Similar to how CDs vary in pricing, Warner Music Group wants the downloads operating in a similar manner.

Steve Jobs, CEO of Apple, is completely against this change.  iTunes has made legal purchasing of music more popular, since their business model is easy and cheap.  “Customers think the price is really good where it is,” Jobs said in a rebuttal to Warner. “We’re trying to compete with piracy, we’re trying to pull people away from piracy and say, ‘You can buy these songs legally for a fair price.’  But if the price goes up a lot, they’ll go back to piracy.  Then everybody loses.”  Jobs believes that due to the efficient nature of the download purchasing over CDs, so that overhead is reduced, the music industry gets a good profit from these downloads.  In Jobs’ eyes, the only reason the music industry would want to raise prices, is because they are greedy.

Such is the tensions between Apple and Warner Music Group right now.  Jobs’ iTunes endeavor has been fairly successful due to its simplistic and fair nature.  But now that iTunes and iPods are fairly established, the music industry wants a bigger piece of the action, considering they don’t share any profits from the iPod sales that have been accelerated through the iTunes phenomenon.  Jobs isn’t budging, and the music industry is threatening to cut off ties with Apple.

However, it is doubtful that the Warner music industry can cut ties with Apple without effectively shooting themselves in the foot.  Universal Music Group, another major player in the music industry, supports Job’s single-pricing.  While other markets in mobile devices could prove promising, Apple appears to be dominating the market in mobile storage chips as well.  Paid subscription downloaders like Napster and Real haven’t been able to hold a candle to iTunes yet, either.  It might be a while before any other product can have an edge over iTunes and iPods, so until then, Apple has the edge.  It seems like all of Warner’s protestations will be in vain, until a better alternative can arise.  Until then, people can enjoy evenly priced music for a while.

Sources:

“Bronfman Fires Back at Apple.” Red Herring.
[ http://www.redherring.com/Article.aspx?a=13702&hed=Bronfman+Fires+Back+at+Apple ]http://www.redherring.com/Article.aspx?a=13702&hed=Bronfman+Fires+Back+at+Apple

Smith, Tony. “Apple Misses iTunes Sales Target by 30%.” The Register.
[ http://www.theregister.co.uk/2004/04/28/apple_itunes_sales/ ]http://www.theregister.co.uk/2004/04/28/apple_itunes_sales/

Aughton, Simon. “Warner Chief Threatens to Scalp iTunes.” PC Pro News.
http://www.pcpro.co.uk/news/78119/warner-chief-threatens-to-scalp-itunes.html

“No Price Hike for iTunes Songs, Jobs Says.” MSNBC Online
[ http://www.msnbc.msn.com/id/9409002 ]http://www.msnbc.msn.com/id/9409002

de Fontenay, Eric. “File Sharers Just Want Cheaper CDs.”  MusicDish Industry e-Journal.
http://musicdish.com/mag/index.php3?id=7666

Posted 2005-11-08 09:57:55 by Yvette Tardiff
Comments on this story... (toggle all)

A balanced but incisive article [Jon Ippolito, 2006-03-04 18:23:20]

I thought this was a terrific article--well organized and written, with a real focus on a cutting-edge issue. It also has a clear-sighted point of view resulting from a balanced analysis.

I agree with Jobs that a consistently low price is the best way to compete with music freely available on p2p. Apart from price, one question that lingers in the background, however, is what other improvements could be made in iTMS. For example, most artists still don't see any proceeds from iTMS, since its funding model is essentially the same breakdown as CDs plus a small cut for Apple. Alternatives like Magnatune give artists 50% and permit unlimited use, unlike Apple's DRM.

Do you see iTMS becoming more open to models like Magnatune in the future, or will this "happy medium" always be the best compromise between the traditional labels and p2p?

jon


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