iTunes Scores With the Beatles, but Apple's Music Sales Still Lag
Everyone loves the Beatles. So it's no surprise that the news that Apple (AAPL) has finally struck a deal to sell the Fab Four on iTunes is getting a ton of attention. For Apple, it's an important deal not just because Steve Jobs loves the Beatles -- but because iTunes could use a jolt to boost revenues, which aren't keeping up with the other parts of Apple's business.
When you look at the numbers, it becomes clear that iTunes is not the raging success that so many assume, at least compared to the mighty sales growth engine that is Apple. Sales of music are growing, but at nowhere near the rate of the iPhone, iPad, or Mac.
In the fiscal year that closed in September, Apple had net revenue of $4.9 billion for "Other music related products and services". According to a footnote in the 10-K, that includes "iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories." The category represented 7.6 percent of total net revenue. Not huge, and actually shrinking. The previous year, other music products and services were 9.4 percent of net revenue. In FY2008, it was 8.9 percent.
Clearly a big part of the drop is the success of the iPhone 4 and the iPad. Sell enough in those categories, and others seem less important. Still, it means that the media business has stopped keeping pace with the rest of the company's growth.
All along, Apple has said that iTunes did a little better than breaking even and that the whole reason for media sales was to drive hardware into the hands of consumers. That may have been true at one point, but a couple of facts have to make you question whether it still is.
One is that music sales aren't even coming close to keeping up with the jumping unit growth of the iPhone and iPad, given roughly stable prices on both the media and hardware fronts. If music was that important an adoption factor, you'd more likely see sales rise at a similar rate. That's because music isn't a driving reason to buy either device. They have come into their own and no longer need the excuse.
The other fact is that Apple faces enormous competition from Google (GOOG) Android. Eventually that will eat into profitbility. In fact, Apple has already begun to warn of future declining margins. Steve Jobs is more than smart enough to know that he'll need other revenue -- services and software and, yes, media sales -- to keep the numbers looking good.
That gets to why the Beatles are important enough to iTunes to get the promotion that Apple has undertaken. You can't argue with the appeal and cultural relevance of John Lennon, Paul McCartney, George Harrison, and Ringo Starr. It's not even as though the idea of tracks being available on iTunes was a secret. In September, Lennon's widow, Yoko Ono, accidentally let slip that Steve Jobs would soon peddle the entire Beatles music catalog.
But the Beatles represent something generally desirable to many consumers that is currently only available on iTunes. Even though the music has been around for more than four decades and available on CD since the late 1980s, Apple has an exclusive, which means a number of things for the company:
- Apple gets to bask in the warm publicity glow that the Fab Four can still conjure.
- There are all those music sales that it will make (though, again, lots of people already have Beatles music on their music players and smartphones).
- Apple can use the announcement in an understated way as a rationale why consumers should use iTunes, and not buy music from the likes of Amazon (AMZN) or Walmart (WMT).
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