Apple: The King of Digital Music

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Behold the King of music, circa 2010. We aren't talking about Elvis here. Apple's iPod still reigns supreme. And judging from the impressive new crop of iPods announced this week along with an update to iTunes, Apple 's dominance of the digital music world seems solid -- at least for now.

Looking at the cold hard numbers, it's apparent Apple has a huge edge over its competitors for MP3 players and digital music sales. Apple CEO Steve Jobs said on Wednesday that the company has sold 275 million iPods since Apple introduced the first iPod device in 2001. Although iPod sales have recently slowed year over year, Apple's portable music player still accounts for 77 percent of MP3 player sales in the U.S, according to market research firm N

PD.  By comparison, SanDisk, Apple's closest competitor for MP3 hardware, owns just 8 percent of the U.S. MP3 player market.

But Apple's digital music success isn't just about iPods. "IPods are part of a great duet with iTunes," Jobs said before introducing iTunes 10. Apple's digital musical combo has led iTunes to own 70 percent of all U.S. music downloads sales, according to NPD. Wal-Mart and Amazon are iTunes' closest competitors for U.S. digital music sales, both claiming 12 percent of the market.

How We Got Here

When Apple launched the iTunes Store in 2003, the most popular way to obtain music was through illegal p2p file sharing services such as Napster, says Mike McGuire, a Gartner market research analyst specializing in online music and media distribution. Despite being illegal, however, Napster's popularity indicated there was interest in digital music and potential for a legal business. Apple's iTunes and iPod combo was able to thrive in this era of early digital music piracy, because it created a "compelling alternative to [file-sharing] that allowed users to pay easily and get content on to their devices," McGuire says.

One drawback to Apple's early music business was its use of proprietary Digital Music Right Management copy protection called FairPlay. Many critics and industry watchers bashed Apple's use of music DRM. The Electronic Frontier Foundation in 2004 called Apple's use of DRM "reprehensible," arguing that FairPlay was more about keeping other MP3 players out of the iTunes Store than protecting copyright. But at the time, Apple believed FairPlay was the only way to convince music labels to sell digital downloads while still protecting music from illegal copying and file-sharing.

Apple's early success in digital music reportedly created an uneasy relationship with the major music labels. Apple's position as the only viable digital retailer meant the company could dictate terms over pricing and a la carte sales: two issues the music industry has fought Apple over at times.

To stimulate more competition and break Apple's stranglehold, the labels introduced DRM-free music in 2007, according to IDC digital marketplace analyst Susan Kevorkian (IDC and PC World are both owned by International Data Group). DRM-free music was supposed to make it easier for others to create products to compete with the iPod, and Apple supported the move to DRM-free music.

Despite a technologically level playing field, however, no competitor has been able to recreate the seamless iTunes-iPod experience, Kevorkian says. The reason is simple: Apple has mastered the entertainment ecosystem with hardware, content management software, and the iTunes Store.

Other hardware makers are lucky to get just one part of that equation right, while Apple had the triple threat almost from the beginning. If there's one thing Apple has proved, it's that people are willing to pay a little more for hardware and content if it delivers an easy-to-use experience and few technical headaches.

The Digital Music Future

iTunes' continued popularity suggests downloads are still the way most users prefer to consume digital music. Nevertheless, many critics believe music will eventually move away from the downloads model to online services thanks to declining digital storage costs, increased bandwidth speeds, and the popularity of Internet-connected mobile devices.

Ad-supported streaming services such as Pandora and Spotify are becoming increasingly popular. Pandora is frequently ranked as the top Internet radio service with about 300,000 listeners visiting its Website at any given time, according to metrics firm AndoMedia. Other possibilities include subscription services such as Rhapsody where you pay a flat monthly fee for unlimited access to a library of millions of songs.  Rhapsody is even available as an iPhone application, putting it in direct competition with iTunes, albeit on Apple's terms.

Gartner's McGuire believes a new market also exists for smartphone apps that provide greater levels of personalization including Pandora's iPhone app and the newly released RDIO.

Digital music has paths beyond iPod and iTunes. Forrester Research music and digital media analyst Mark Mulligan sees an important role for the iPad and similar tablet computers in the future of digital music. "[The] next generation of music products will fully leverage video, interactivity, and social functionality," Mulligan says. "In this context large touch screen devices will become the catalyst."

Apple on Wednesday started moving towards more "social functionality" introducing Ping, an iTunes-based, music-focused social network. Apple is also experimenting with interactivity with features such as iTunes LP. Inspired by the 1970's-style album cover, iTunes LP is meant to enhance your digital music experience with album liner notes, lyrics, artwork, and exclusive photos and video.

Apple may be planning to launch a cloud-based version of iTunes in the near future. The company recently bought Lala, an online music storage and streaming service, and Apple is investing heavily in a massive server farm located in North Carolina. No one is quite sure what Apple's plans are for its new data center, but iTunes is so important to Apple's success many assume a cloud-based iTunes is in the works.

As music and entertainment services move online, there may be a chance for other companies to break Apple's dominance over digital music. But the powerful combo of the iPod and iTunes, along with experiments in interactivity, social features, and -- perhaps next? -- online services could mean Apple will be digital music's gatekeeper for many years to come.

Connect with Ian on Twitter (@ianpaul).

This story, "Apple: The King of Digital Music" was originally published by PCWorld.

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