How the iPod killed the music industry as we knew it

On Saturday, November 10 2001, Steve Jobs killed almost saved the music industry as we knew it: the first generation of the iPod reached the Apple Stores.

So let’s flash back to those prehistoric times. For about two decades, the music industry had made a killing by distributing billions and billions of digital masters. The CD, as conceived in the 1980, wrapped up the vinyl album into a shiny digital disc and propelled sales figure to an entirely new level.

But now, at the turn of the millennium, the CD monoculture found itself under attack. The PC (formerly known as a strange device for decidedly uncool nerds) and the Internet (formerly known as a service for decidedly strange scientists) had tainted the love affair of the industry with all things shiny and digital.

And a monoculture it was. Let’s have a look at the US-sales figures in 2001. The CD delivered roughly 94% of all revenues. As we know from the world of agriculture, monocultures have their advantages. You can waltz with hugely oversized machines through fields the size of the Central Park profiting from economies of scale. The drawbacks are equally known. “Monocultures can lead to the quicker spread of diseases”, as Wikipedia drily states.

The music industry fought the digital pest of copying their freely distributed masters like any Idaho potato megafarmer would do. After ignoring the first signs of disease, they started crop dusting. As with any pesticide, spreading DRM and later on even (involuntary) infecting PCs with root kits had some serious side effects. Their legal crop dusting may have killed Napster. But in 2001, after several years of digital infights, legally buying and downloading music was still virtually impossible. (Look at the charts, based upon RIAA revenue figures: downloads will not even appear before 2004.)

But back to 2001. “iPod’s built-in FireWire® port lets you download an entire CD into iPod in under 10 seconds and 1,000 songs in less than 10 minutes,” boasted Apple in their press release. Yup. Basically, the iPod was CD player on steroids – sans discs and drive. You filled it by ripping your CDs on a Mac (no Windows yet). Strike your CDs. Any CD was fine. (Or you gathered some music files by strolling through the darknets of the times. But that’s a different story)

Now, let’s have a look at the CD. The recorded music industry, as any media industry, extracts value out of content by selling it via a medium. It’s a productification process, but it does no stop there.

Traditionally, the music industry bundled their content either into a single (buy one medium, get two pieces of content) or an album or compilation (buy one slightly more expensive medium, get at least eight pieces of content). Broken down, an album equals to a price incentive of something like buying 10 for the price of six.

From the business perspective, getting consumers to buy such a bundle makes perfect sense. Especially, if you are in an increasing returns business like software or media: the production of the content is a one time expenditure. Duplication and distribution add only marginal costs. Hence, the more you sell, the higher the returns.

The value proposition seemed to have worked pretty well. Can you spot the CD-Single, containing mostly four titles? In 2001 it’s this tiny little orangeish sliver down there on the right, with a share 0.6% of all sales. Good for the industry. Because the cost of producing and distributing the single equals pretty much the cost of the whole album – which generates much more revenue.

As we saw, the original iPod was still somewhat of positioned as a CD aggregating device, somewhat legally filled by buying CDs and putting your music onto your device. Yes, overall sales were declining. But the industry was still selling bundled content to the consumer.

On April 28, 2003 this was going to change. Opening as the iTunes Music Store Apple, albums were still available. And still, the price for the bundle was lower than buying just a single piece of content. But how did the consumer react?

Have a look at the sales figures of 2010. The CD is shrinking fast, downloads are gaining just fine. But look at the product shares: 20% Download Singles vs 12.1% Download Albums. Essentially, more than two thirds of the formerly sold content bundles are replaced by single downloads.

Coming back to the iPod. The device family still holds a market share of way over 75%. As pure software, it lives happily in every iPhone. The interface still honors the good old times of the album and the compilation. But buying music has massively changed. Be it the iTunes store, Amazon’s mp3 downloads, or any other digital music warehouse: single downloads rule.

Next time: what is really going on there? Is this sustainable? And can or should there be anything done?