The Current iTunes Business Model The Current Economy of iTunes
The Current iTunes Business Model What is the current iTunes business model? iTunes is a Bit Vendor – “a merchant that deals strictly in digital products and services and, in its purest form, conducts both sales and distribution over the web” With regards to internet business models, Bit Vendors fall into the category of the Merchant Model. Companies who use the Merchant Model are wholesalers and retailers, selling goods and services over the internet. (Rappa, 2010)
The Current iTunes Business Model Other categories in the Merchant Model include: Virtual Merchant (eg Amazon.com) – an “e-tailer” or retailer or who only exists on the internet. Catalog Merchant (eg Landsend.com) – a mail order business with catalogues based online. Orders can be made via telephone, mail or online ordering. Clicks and Mortar (eg. BarnesandNoble.com) – a bricks and mortar retail store which also has a web store. (Rappa, 2010)
The Current iTunes Business Model How does iTunes relate to the fundamental economic basis of Internet commerce? Music iTunes relies heavily upon network effects to grow economically. The more people who use iTunes, the more artists and music labels want to get on the iTunes bandwagon. This makes iTunes more attractive to the average consumer. Because of growing network effects, iTunes have over 13 million songs, priced at either 69c, 99c, or $1.29 (Apple.com, 2010, Purchasing Music)
The Current iTunes Business Model Apple makes a profit of roughly 10 cents per song (Savitz, 2007) On 25/2/2010 iTunes celebrated 10 billionth song download (Apple.com, 2010, iTunes Store Tops 10 Billion Songs Sold ) By harnessing the power of network effects iTunes was the market leader in digital sales in 2009 in the US (Verhoeven, 2010)
The Current iTunes Business Model Fig. 1 demonstrates iTunes’ market dominance: (Frommer, 2009)
The Current iTunes Business Model The App Store Network effects apply strongly to the iPhone/iPad and the iTunes App Store. More downloads in the App Store encourage more developers to create new applications This encourages consumers to spend more money on iPhones/iPads and Apps. At present, iTunes has Over 200,000 apps made by over 100,000 registered developers (Apple.com, 2010, Apps for iPhone ) Individual iPhone App developers pay $99 per year for a developer license, enterprises pay $299 per year (Elmer-Dewitt, 2009)
The Current iTunes Business Model The App has market dominance not only by using network effects, but a combination of the attention economy and the free economy (also known as the gift economy.) The App Store offers free games/applications to attract new iPhone/iPad users to the store. Once they have the consumers attention, they can showcase the large number of paid application they have in store. Many free applications have a premium paid version.
The Current iTunes Business Model Fig. 2 demonstrates App Store’s market share: (Nielsenwire, 2010)
The Current iTunes Business Model Fig. 3 demonstrates iPhone application popularity: (Nielsenwire, 2010)
The Current iTunes Business Model What are the advantages of the Bit Vendor Business Model? By dealing in digital products the costs of warehousing and goods handling are wiped out By distributing digital products over the internet postage and packing costs are also eliminated (Hansell, 2008) Delivery of purchases is instant over using broadband technologies The means to store a large variety of stock gives iTunes long tail aggregator status (Anderson, R, 2007)
The Current iTunes Business Model Being a digital store allows a low cost way for the long tail theory to be applied. Digital products can be kept regardless of their age Disk space is cheap, and digital products last forever Older songs and niche genres attract a wider demographic (Anderson, C, 2004)
The Current iTunes Business Model Fig. 4 demonstrates the long tail business model (Anderson, R, 2007)
The Current iTunes Business Model Conclusion iTunes has gained market leadership by using network effects, the attention and free economy. In today’s competitive internet commerce world, offering something for nothing is an effective way to get attention. Providing a user friendly interface and a vast combination of popular and niche items (applying the long tail theory) is very effective in attracting and retaining a wider range customers.