Streaming challenge for iTunes

The late Apple CEO Steve Jobs once said iTunes was “miles ahead of every jukebox application.” But 13 years after its release, the pioneer of Internet music sales finds itself in the same position as the record stores it made obsolete.

ITunes, which makes money selling digital media downloads, is in danger of losing customers to streaming services like Spotify and Pandora, which let users listen to as much music as they want for free with commercials, or commercialfree with a paid subscription.

“This is the next big shift, and albums might be collateral damage.”

Mark Mulligan. MIDiA Research

Capitalizing on the shift toward cloud computing and the growing ubiquity of mobile devices, streaming services are making music more portable than ever — without taking up precious space on smartphones.

Especially among younger users, buying digital albums is starting to feel like a relic of the last decade.

“This is the next big shift, and albums might be collateral damage,” said Mark Mulligan with MIDiA Research.

Digital sales fall

Digital music sales recently fell for the first time ever, with the number of digital songs purchased plummeting 13 percent to 594 million in the first half of 2014, compared with the same period a year ago, according to research firm Nielsen, which has tracked music sales since 1991. Meanwhile, the amount of music streamed online rose 50 percent, the firm said.

The data is particularly troubling for iTunes because the 35 million or so consumers who pay for music streaming services like Spotify and Pandora are people who spend a lot of money on music online, Mulligan said. Now that consumers can stream all the music they want, about 23 percent who used to buy more than one album a month no longer do so, Mulligan said.

That has put pressure on iTunes — which has the dominant market share of digital music downloads — to revamp its store and offer more streaming music services. Last year, the Cupertino company launched iTunes Radio, which lets customers stream music for free with commercials. The product steers users toward making iTunes purchases (choose the Taylor Swift channel on iTunes Radio and you’re streaming “You Belong With Me,” hit the buy button and immediately download it onto your iTunes library).

Trails streaming services

But the service is far from being a market leader. ITunes Radio ranks third in the streaming music industry, still behind competitors like Oakland’s Pandora and Stockholm’s Spotify, according to Edison Research.

In May, Apple made moves to cement its presence in streaming. The company purchased luxury headphones manufacturer Beats Electronics and streaming music service Beats Music in a $3 billion deal. The Beats companies were founded by rapper Dr. Dre and record producer Jimmy Iovine.

Analysts said the Beats deal signals that Apple plans to somehow incorporate its streaming site into its business.

“They recognize that people want to consume music in different ways,” said Patrick Moorhead, president of Moor insights & Strategy. “Beats is their online solution to that.”

Apple declined to comment on its plans for Beats Music.

Beats Music charges $10 a month for consumers to listen to more than 20 million songs as many times as they want. The cost is similar to Spotify, which lets users build their own playlists and listen to it ad-free for the same price.

Artists lose money

While streaming sites have helped big online music spenders save money, they have also cut into the money that musical artists make per song.

“Artists are very concerned that they will not be able to make a sustainable income based on streaming services alone,” said Sarita Stewart, an assistant professor at Belmont University’s Mike Curb College of Entertainment and Music Business.

ITunes sells songs for 69 cents to $1.29 each. For a song that costs $1.29, Apple takes 30 percent of the sale and the rest goes to the record label and artist, Stewart said. If the artist is on a record label, they would get a royalty of about 20 cents for that track, she said.

That might not seem like a lot, but the money could be even less in streaming music for free with ads. In general, a song must be streamed 75 to 80 times in order for a music label to make the same amount of money as from a single online song purchase, according to MIDiA Research.

“All they are doing is just reducing the total amount of money in the system,” said Larry Rosin, president of Edison Research.

Apple could lead change

One big problem is that streaming sites haven’t been able to coax most listeners, who use the free service with commercials, to begin paying a few dollars a month through a subscription. But perhaps Apple could spark that change, analysts said.

Apple has a significant advantage over its rivals because it creates the operating system for iPhones, so the company may have some leeway in placing its streaming music apps more prominently on its devices and in its app store, analysts said.

Mulligan from MIDiA Research said he could see Apple offering various levels to get access to streaming music, with perhaps one tier at $3 or $4 a month, undercutting competition. That lower price point, however, could mean less money going back to artists.

ITunes still has time to find a way to compete. The iTunes division in Apple’s third quarter raked in nearly $4.5 billion in sales, up 12 percent from a year ago. Music represents more than half of the division’s revenue, Moorhead said. The rest comes from electronic books, video, apps, licensing and other services. But analysts warn that streaming music sites can still take a bite out of Apple’s sales.

Drumming up buzz

Meanwhile, Apple has tried to drum up more buzz for iTunes. The company’s biggest push was last month, when Apple placed a free link to download U2’s latest album, “Songs of Innocence,” in the iTunes libraries of all users. Apple said 26 million people have downloaded it.

That’s compared with 14 million customers who bought music from U2 since the iTunes store first opened in 2003, said Eddy Cue, Apple’s senior vice president of Internet software and services in a statement.

But not everyone wanted a free U2 album. Some customers were so annoyed to find U2 in their iTunes library that they demanded instructions on how to delete it. Bono, U2’s lead singer, recently apologized in a Facebook video after a fan called it rude and begged the band not to do it again.

“It was music spam,” Mulligan said.