<p>This week, Apple (NASDAQ: AAPL) announced that it is closing iTunes. Among other things, it will be replaced with a music app. Over the years, iTunes has gradually shifted from a killer software to a bloated and frustrating mess. Still, iTunes shuts down an era and also raises an pressing issue for the AAPL stock.
Will Apple be able to regain its leading position in digital media?
Or has it been left permanently in the dust by more agile rivals like Spotify (NYSE: SPOT) in music and Netflix (NASDAQ: NFLX) in video?
iTunes, an important part of Apple’s revival
Apple launched the first version of iTunes just a few months before they started selling their iconic iPods. Young readers may not remember, but it was actually the iPod, not the iPhone, that saved Apple from its catastrophic decline at the turn of the century. The iPhone would lead AAPL layers to great heights. But none of that would have been possible without the synergistic iPod and iTunes combination that paved the way.
In 2003, iTunes took a big step forward by starting selling music. Until that time, it was virtually impossible for a consumer to legally purchase from various record companies. With the iTunes digital store, people could finally buy everything they could find in a record store – and more – without breaking the law.
As the music industry continued to decline, iTunes helped slow down the devastating wave of music piracy. For a decade or so, it had high times. The record companies were happy to have another source of income, and people got access to virtually all recorded music in just a few clicks.
Over time, Apple built on the success of the iTunes Store and also added other products. For a while, it managed to sell a large number of movies. It even had a robust company that sells individual TV shows often for $ 1.99 per pop. Surprisingly, Apple did not collect a large portion of this digital media revenue. Then a hot music single can, for example, sell hundreds of thousands of copies per week. Apple generated a lot of increased revenue from this.
Apple lacks the increase in subscriptions
But as good as the good times for the iTunes store, they were not meant to last. Interesting here is a nice question about the former CEO Steve Jobs’ strategic intuition. In 2003, he said listeners “did not want to rent their music.” Regarding the subscription model for music, he said that it simply “does not fly with customers”.
After Jobs’ death, Apple dutifully stuck to its own, not rent, model for music, movies and other digital media. However, one would have to wonder if Jobs would have calculated that consumers’ preferences had changed in time for Apple to take a leading position in the new gaming area. Tim Cook certainly did not. His supervision has left the company in a much worse position as the media has shifted from digital ownership to subscription models.
In 2014, Apple acquired Beats Electronics, which included the volatile music service that would later become Apple Music. Alas, this move was years too late. Spotify had been launched many years ago and was already gaining momentum when the US listener base gained momentum.
Apple stuck playing Catch-Up
With iTunes and the iPod, Apple basically created the digital music scene. There were some MP3 players before the iPod but they had serious limitations. And there was no digital jukebox or music store near iTunes. With Apple Music, however, the company has had to invest heavily in marketing simply to try to catch up with Spotify and stay ahead of other potential rivals such as Amazon (NASDAQ: AMZN). Thanks to its unsurpassably strong brand at home, Apple has become a strong rival to Spotify in the United States. But it is being killed in Europe and emerging markets where the iPhone lock-in effect is not nearly as strong. Spotify has a huge advantage with the brand in many of these markets.
In video, things look even worse. The Apple + TV service will come later this year. The company will spend a lot on original content to try to compete. But with Netflix already owning the space and capable rivals like Walt Disney (NYSE: DIS) leading the charge against Netflix, Apple will be another bit player who does not have enough to keep up with the leaders in video streaming.
The iTunes end shows problems with AAPL layers
None of this indicates that Apple is a bad company or that AAPL shares are destined to flare up. But even the company’s proponents must admit that the creative spark has largely been lost since Cook took over. The company has been producing few truly innovative products or services for several years. Apple continues to live off the big money they earn from the iPhone. It may continue for quite some time.
But at some point, the company has to come up with something new. The current service is good for keeping revenue stable, but it still depends on owning the iPhone ecosystem. With the iTunes Store, it had a great business model (capturing a large portion of every sale with minimal overhead) that drew revenue from everyone, not just iPhone owners. Unfortunately, the easy cash flow is now lost for Spotify and Netflix as the iTunes era winds.
Ironically, after several years without news, Apple announced a brand new updated iPod. It can be good for some short-term gains, especially if they can make money on people’s nostalgia. But this type of “innovation” will do little for the AAPL stock. They can not continue to let newcomers like Spotify and Netflix steal their established markets if they want to remain the world’s leading consumer technology companies.
At the time of writing, Ian Bezek had no positions in any of the above securities. You can reach him on Twitter at @irbezek.