More on the Amazon MP3 Store

Wednesday, 26 September 2007

So why is Amazon even bothering with a music download store, given that “everyone knows” the iTunes Store is a loss-leader that Apple offers just to sell more iPods?

Because that’s bullshit. Apple is making good money from the iTunes Store. The FAQ from TuneCore — a company that handles digital music distribution for copyright holders — lists the royalty rates paid by online music stores, including iTunes:

For the iTunes U.S. store, you receive $0.70 per song sold individually and $7.00 per album with 11 or more songs sold in its entirety.

This 70/30 split of the revenue was echoed by Vivendi CEO Jean-Bernard Levy, in the midst of his complaining that Universal Music Group’s contract terms with iTunes are “indecent”. Reuters reported:

At present, UMG, the world’s largest record company, gets 0.70 euro ($0.99) out of the 0.99 euro retail price charged by iTunes, Vivendi said.

So, ballpark-estimate-wise, it’s safe to say Apple gets about 30 cents per song sold — and even more for songs sold in Europe, given the euro’s current strength against the dollar. On July 31, Apple announced that they’d sold the three-billionth song from the iTunes Store. Three billion songs times $.30 per song is $900 million.

Bandwidth, credit card processing fees, and whatever other costs Apple incurs running and developing the actual store come out of Apple’s share of the revenue. Those costs are significant, but it’s a pretty good bet they’ve totalled up to a lot less than $900 million.

And, iTunes Store music sales are growing — fast. Apple announced the two-billionth song sold just six months earlier. Even if the acceleration stops, which it won’t soon, Apple is already selling two billion songs per year, for $600 million in revenue.

And, as if that weren’t enough, I suspect Apple makes a nice chunk of change on the other $.70 of each song sold. Assuming Apple issues payments to the record labels only periodically — weekly, monthly, quarterly — Apple gets to hold onto that money in the interim, during which time they earn interest on it. It doesn’t require a high interest rate to make a lot of money on two billion dollars flowing through your hands.

In short, while Apple doesn’t earn much at all on the sale of a single song, they make up for it in volume. And squeezing profits out of low-margin high-volume transactions is right up Amazon’s alley. The iTunes Store podcast directory? Maybe that’s a loss-leader. But the iTunes Music Store? That’s serious business.

Quote of the Day

Which brings me to the jackassiest comment of the day regarding Amazon MP3, from Jupiter Research analyst David Card to the Associated Press: “In and of itself, (Amazon MP3) isn’t enough to change any market share. They have to do a good job at building their store.”

Well, perhaps Amazon can find a book or something about how to build a successful high-volume online store.

It remains to be seen how well Amazon can market their MP3 store, and how quickly they can raise awareness about just how cool it is. But in terms of online store technology, it’s already in the bag. This is what Amazon does; it’s exactly the sort of business that makes Amazon Amazon.

In fact, the tragedy is that Amazon could have built this store 10 years ago — the music labels simply wouldn’t allow it. What’s happened now is that the music label executives — at least at Universal and EMI — have finally gotten it through their thick skulls that it’s the iPod that drives iTunes sales, not the other way around. Apple’s FairPlay DRM isn’t (at least primarily) some sort of lock-in scheme to force people to buy iPods; FairPlay was a requirement stipulated by the labels, without which they would not have allowed Apple to sell their music at all.

People buy iPods because they love them. If your music doesn’t play on iPods, it isn’t going to sell. And so if (a) you refuse to sell music downloads without DRM; and (b) no other DRM system other than Apple’s is compatible with iPods; then we’re left with a situation where the only successful store is going to be iTunes. What Universal and EMI now seem to have learned, at long last, is that (b) is completely under Apple’s control; only (a) — the labels’ own willingness to allow their music to be sold without DRM — is under their control.

The hard part for Amazon wasn’t building the store. The hard part was getting two of the four major music labels to allow them to do it.

David Kravets nails it in his spot-on analysis for Wired News, “Like Amazon’s DRM-Free Music Downloads? Thank Apple”:

Edgar Bronfman, Jr., the Warner Music Group chairman, told Goldman Sachs investors in New York last week he was considering removing DRM from Warner’s music downloads — this just months after suggesting Warner would never abandon DRM. He blamed Apple for the apparent change of heart.

“We need some online competition” for Apple’s iTunes Music Store, Bronfman said. He conceded the iPod is “the default device” and iTunes the “download model.”

Universal seems to be taking a particularly hardline — if not outright spiteful — approach in their continuing negotiations with Apple. EMI is already selling DRM-free music through iTunes, as the only label from the big four participating in Apple’s iTunes Plus. Universal, on the other hand, isn’t selling DRM-free music through iTunes. If you want DRM-free music from Universal, you can only get it at Amazon.

Miscellaneous Other Observations

  • While the terms state that the Amazon MP3 Store is intended only for use in the U.S., there’s apparently a relatively simple workaround. A slew of non-U.S.-resident DF readers report that they’ve been able to purchase and download music from Amazon simply by supplying a bogus U.S. billing address for their non-U.S. credit card. Unlike many other online stores — including, apparently, Amazon’s own Unbox — the Amazon MP3 Store isn’t checking that the billing address you supply is the actual billing address for the card. (I suspect this isn’t going to last, though.)

  • Interesting to see Amazon use “MP3” as part of the store brand — it could have easily been the “Amazon Music Store”. Using “MP3” instead of “music” emphasizes two things: (a) that this is about downloads as opposed to CDs (which are still a lucrative business for Amazon); and (b) it helps establish the openness and compatibility of the music they’re selling. People know that MP3 files play everywhere, including iPods. “MP3” is a concise way of saying “DRM-free”.

  • You can find some significant differences between Amazon’s and iTunes’s prices for the same music. DF reader Sunil Kapoor pointed to the album Cornell 1964 by Charles Mingus, which sells for $16.99 at iTunes and $8.99 at Amazon.

  • Radiohead only wants to sell complete albums. Apple, although it allows album-only tracks, will not carry entire albums containing no tracks that can be purchased individually. The end result: Radiohead albums are available at Amazon, but not at iTunes.

  • Amazon’s single pricing is based on track length. Songs that are more than seven minutes long cost $1.94, songs more than 14 minutes cost even more. This isn’t necessarily a bad deal compared to iTunes — Apple makes many of these tracks album-only. E.g. Pink Floyd’s 23-minute-long “Atom Heart Mother”: $3.87 from Amazon, album-only from iTunes.

  • A couple of readers pointed out that eMusic — which has been selling DRM-free MP3 music from independent music labels for many years — also recently released a download manager for Mac OS X and Windows, which, like Amazon’s, automatically adds the music you buy to your iTunes library. Amazon’s Mac client, though, is a real Mac application; eMusic’s is written in XUL, the cross-platform Mozilla runtime.

    My main gripe about eMusic isn’t their download manager. It’s their business model. I don’t want to sign up for an account before I can simply browse their store. I wouldn’t shop at a brick-and-mortar store that required me to sign up for something before I got in the door, either. Frankly, I’m surprised eMusic has thrived with a home page that shows you nothing other than a sign-up form.