RonDoids: Apple No. 1 in paid digital music sales.

Published: June 9, 2013

SAN FRANCISCO ? Apple is known for making some of the finest hardware in the world, but one of its biggest stumbling blocks has been services that rely on an Internet connection.

Apple?s iTunes software on a MacBook Air. The program?s 500 million users make Apple No. 1 in paid digital music sales.

Apple?s Maps app for iPhones was initially so bad the company apologized. Ping, Apple?s social network for discovering songs, was killed because hardly anyone used it. And iCloud, its service for synchronizing user data across devices, has been criticized for being unreliable, though it has not had as many glitches as its predecessor MobileMe, which had an e-mail blackout that disconnected thousands of customers for days.

Now, Apple is giving online services another try, in an area where it has long been the leader: music. On Monday, at the opening of its annual developers conference in San Francisco, the company is expected to unveil an Internet radio service that will stream songs over a data connection instead of storing them on a device, according to people briefed on the negotiations. The service is expected to be free, but supported by ads.

With its Internet radio service, Apple will be following other online music services, like Pandora, Spotify and Rdio. But it could spread this type of music consumption further into the mainstream, some analysts say.

?The genius of iTunes 10 years ago was that they made the mainstream consumer understand what digital music was, and how it all worked,? said Russ Crupnik, an analyst at NPD Group who studies the digital music market. He said Pandora was mainstream, with 200 million registered users, but it was not a dominant global player, and that a similar service from Apple would expose more people to online radio.

The company is also expected to introduce new Mac notebooks and a redesign of iOS, its software operating system for iPhones and iPads, at the four-day developers conference. The conference includes seminars where software developers can get training on the latest Apple software development tools so they can start making apps.

The new operating system will be the first mobile software system made under the company?s lead hardware designer, Jony Ive. Mr. Ive was put in charge of software design after the company fired Scott Forstall, the former head of mobile software development, amid the flurry of negative news reports surrounding Apple?s mapping software.

Before taking over software design, Mr. Ive made it known in the company that he did not like some of the visual ornamentations in Apple?s mobile software, particularly the use of textures representing physical materials. Under his direction, elements like the yellow-notepad inspired Notes app and the leather borders in the Calendar app for the iPad are expected to be removed from the software. The overall look will be smoother and less ostentatious, according to a person briefed on the company?s plans, who asked not to be named.

For Apple, the expansion into streaming music underscores a competitive issue: one of its chief rivals, Google, has long had robust Internet services, like Gmail and Google Apps, while over the years it has gotten better at designing the software and hardware for its phones and tablets.

But while Apple struggles with Internet services, its stock is down about 37 percent after peaking at a little more than $700 in the fall. The company is still selling tens of millions of iPhones and iPads, but investors are concerned about its growth slowing and profit margins getting tighter. A shift into services like Internet radio could present new opportunities to make money.

But James McQuivey, an analyst at Forrester Research, says he thinks Apple is too late in this game. The company has to present an Internet radio service that is better than what is out there, he said, or people will continue to just buy its hardware and use other companies? services.

?It?s going to have to innovate,? Mr. McQuivey said. ?It can?t just be Pandora with an ?i? in front of it or Spotify with an ?i? in front of it.?

In the late 1990s, the music industry was in turmoil because many Internet users quickly learned they could download their favorite songs for free instead of paying for albums. Steven P. Jobs, Apple?s late chief, approached the music labels with the idea of a store offering the ability to download songs a la carte for 99 cents a download.

?When we first approached the labels, the online music business was a disaster,? Mr. Jobs was quoted as saying in the book ?The Perfect Thing: How the iPod Shuffles Commerce, Culture and Coolness.? ?Nobody had ever sold a song for 99 cents. Nobody really ever sold a song. And we walked in, and we said: ?We want to sell songs ? la carte. We want to sell albums, too, but we want to sell songs individually.? They thought that would be the death of the album.??

? In 2003, Apple was the first company to legitimize digital music when it opened the iTunes Store, a legal way for people to download and purchase digital songs. Now digital music has grown far beyond the traditional album. Many companies offer the ability to stream music over a data connection.

Spotify, for example, based in London, lets people search for songs and immediately stream them over the Internet on their smartphones and computers; a free version of the service plays ads every few songs, but paying $5 a month will skip the ads.

Rdio, another music streaming service, costs at least $5 a month to stream songs from a computer, but it has an emphasis on social networking, or discovering music by looking at what friends are listening to.

And Pandora, launched 8 years ago, lets users create their own stations by entering an artist and then automatically playing songs similar to that artist. Its ad-free upgrade is $4 a month.

But online streaming services are not as popular as iTunes, which counts about 500 million customers with their credit cards on file. Apple is still No. 1 in the paid digital music market with a 63 percent share, followed by Amazon at 22 percent, according to NPD Group.

In a study, NPD said it found that 44 million Americans bought at least one song or album download last year, a number that has remained stable despite the growth of Pandora and music streaming services. A separate NPD study found that people who stream music are much more likely to buy music downloads.

When Apple enters online radio, it will be difficult for companies like Spotify and Pandora to compete, said Laurence Isaac Balter, chief market strategist at Oracle Investment Research, which has clients that own Apple shares. He said Apple will be at an advantage because it will have deeper control of the iPhone software and hardware, as well as more data about its own customers, than outside companies would, so that it can make smarter music recommendations for customers. Streaming music will also give customers a chance to listen to music they would otherwise never have heard before, and then perhaps buy the songs in iTunes, Mr. Balter said.

Mr. Balter added that Apple could potentially leverage the user data it gets from streaming radio and expand it into a future Apple television, where people could find video content about their favorite bands or even purchase concert tickets on the bigger screen.

?There?s so much of a white canvas here for Apple to paint on,? Mr. Balter said. ?It?s refreshing to see them start to think in this area.?

As Apple expands its product lines to include cheaper products, like the iPad Mini and a rumored cheaper iPhone, its profit margins will decrease. That is when the importance of online services will become even greater for Apple because they will provide more ways to make money, Mr. McQuivey said.

?If Apple doesn?t make this shift to services,? he said, ?they won?t be left with a leg to stand on.?

Source: http://rondoids.blogspot.com/2013/06/apple-no-1-in-paid-digital-music-sales.html

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