Behind Blue Eyes

OK, this is not actually about music per se, but to me, it is pretty significant. Today it has been reported that the iTunes Music Store (iTMS) reached third place in music sales market share—behind Wal-Mart and Best Buy. This is a great opportunity for me to explain my view of why this is happening—and why it is a good thing. And let me point out that I think this is not just about Apple’s iTunes Music Store, this is about digital music sales versus hard copy (CD) sales. The Apple part of the story is just because they are further ahead on the development curve than other digital music retailers. This market is still very young.

The “music industry” has always been about promoting the latest material with the broadest appeal. I guess it makes sense because these songs, albums and artists generate the most cash for the companies that are behind them. The iTunes Music Store is not very different in that regard. When you first visit, it comes at you much like a traditional “record store”. You see what’s new, you see a ranking of what is selling, and there are various promotions scattered about. But, I think that is only a small part of their potential business.

Deep Catalog Is Where It’s At

For me—and I suspect for many others—the real attraction of iTMS is the huge amount of “deep catalog” (any music more than a few years old). This is the result of a decision made by Apple a few years ago. Realizing that one of the big benefits to music publishers is the elimination of hard inventory (CDs) it is now economically feasible (actually quite profitable) to add any material and make it available to the entire market at one time. Apple put out a plea to all owners of recorded music to consider making it available on iTunes. Apple would help them convert the music from whatever form (tape, wax, vinyl, etc) to digital files that would be sold over iTunes.

This is as close to free money as any could offer a music owner. For a tiny upfront cost and no marketing costs their songs would now be available to anyone searching through iTMS. No manufacturing, no inventory, no distributors, no cut-outs. (There is no need to print a catalog at all—the store is the catalog.) I think Apple thought they were going after The Long Tail of music sales, but I think that a larger market was revealed. While the traditional music buiness made a fair chunk of money with deep catalog, the old economics of manufacturing and inventory held down its margin and its market size. People were still interested in buying that music, but it was either unavailable or too hard to find.

Deep catalog sales is what kept real record stores alive after stores like Wal-Mart and Best Buy started sucking away the high-volume, high-margin music sales. Deep catalog needing physical and geographic inventory could not sustain the stores like Tower Records. Once it was apparent what digital sales would do to the old distribution model it was clear that the full service record store was on its way out. I think that once everyone in the country has 2 or 3 iPods, even Wal-Mart and Best Buy might be in trouble. Remember that they need high volume of each unit to make things work for them. That is why they only have new music. For someone like me Wal-Mart is irrelevant and Best Buy is nearly so. Once the really general population gets used buying new music online, the big discounter will be forced to dump their music sales. It will not happen all at one time. And physical CD sales will not go away, some people will always prefer it. 

Now let's get back to music.