Page 229 - Battleground The Media Volume 1 and 2

0 | The Tunes Effect

music tastes with others (including recording artists and celebrities). iTunes
makes additional recommendations based on a customer’s previous selections.
As one recording industry executive stated, “Until Apple, it wasn’t cool to buy
digital music. This was about getting to that pivotal group of people—the people
who buy the cool sneakers and wear the right clothes—and showing them that
legally downloading music could be cooler than stealing it” (Black 2003).
Within six weeks, Apple had sold 3.5 million songs online. In addition to
iTunes’s attractive interface and personalized features, a major attraction was its
simple pricing. Each download costs 99 cents, and users can “cherry pick” their
favorite songs rather than purchase an entire CD. Given that CDs cost an aver-
age of $14 and feature an average of twelve songs, the 99-cent rate is slightly less
than the cost of a song on CD. It should be noted, however, that iTunes down-
loads cost ten times more than 45 rpm singles did in the 1950s when adjusted
for inflation, even though downloads have no costs for manufacturing, ware-
housing, and shipping (Harmon 2003).
Some artists, such as the Red Hot Chili Peppers and Metallica, were unwilling
to license their recordings to iTunes because they believed that selling individual
songs would break up the artistic continuity of their CDs. The Beatles continue
to be holdouts, and other groups offer only a smattering of their recorded output
on iTunes. The “unbundling” of CDs also met with resistance from the record-
ing industry, which is concerned that downloads will cannibalize CD sales. The
four major record companies (Universal, Sony/BMG, Warner, and EMI, who col-
lectively sell 85 percent of recordings around the globe) would prefer a variable
pricing model for downloads rather than a flat 99-cent fee. New singles or hits in
demand could sell for $1.49, while “oldies” or less popular cuts could sell for less
than 99 cents. Apple does allow variable pricing for downloads of entire CDs,
yet the company expressed concern that higher prices for individual downloads
would send potential customers in search of songs fleeing to unauthorized peer-
to-peer networks.
By October 2006, Apple’s iPod accounted for 76 percent of digital music play-
ers, and iTunes music store was responsible for 88 percent of digital music sales
(Mossberg and Boehret 2006). However, Apple sees little money from the sales of
iTunes downloads. Out of each 99-cent download, the record company receives
approximately 30 cents, the artist receives twelve cents, middlemen receive ten
cents, and song publishers receive eight cents. Of the remaining 40 cents, up to
23 cents go to credit card processing fees. That leaves 17 cents to pay for band-
width charges and costs related to maintaining the iTunes Web site, as well as
customer service. Essentially, Apple is using the iTunes store (which is relatively
unprofitable) to bolster sales of its iPod players (which are highly profitable).
Given the iPod’s success, Apple appears to be transitioning from computers into
consumer electronics, using services like iTunes to spur demand for its products.
In a move that signaled their intention to move into video hardware and soft-
ware, Apple unveiled a Video iPod in October 2005, which featured a 2.5-inch
screen and sold for $299 or $399, depending on storage capacity. The iTunes
service also offers downloads of TV shows, short films, and music videos for
$1.99 each.