Takin’ care of business, rather badly

Kevin Maney discusses the state of the online music business in his weekly USA Today column.

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The online digital music business stinks.

ITunes, Rhapsody, Zune Store, Napster — you name it. They're all failures.

The hype has people believing otherwise. Bloggers, tech writers and your friends who know more about computers than you do shout that iTunes is the best thing to happen to music since the microphone. Or maybe psychedelic drugs.

But it's just not true. Nearly six years after the introduction of iTunes and the iPod, online music has failed to interest the vast majority of the world's music consumers. Which is no doubt why Steve Jobs recently called for an end to copy-protection software on digital songs. Something has to change, or iTunes and its ilk will never break into the mass market.

Jobs admitted that iTunes' penetration has been weak. In his discussed-to-death essay, "Thoughts On Music" — posted a couple of weeks ago on Apple's website — Jobs noted that only about 3% of songs on a typical iPod are bought on iTunes. The rest are either ripped from CDs and transferred into iPods, or illegitimately downloaded for free off file-sharing sites such as Kazaa or eDonkey.

The reality for iTunes might not even be that good.

In a report released in December, Forrester Research said it did a strenuous, independent analysis of iTunes purchases. It found that just 3.2% of all "online households" — homes that have computers and Internet connections, a subset of all homes — made an iTunes purchase over a one-year period.

About 10% of buyers purchased just one track during the entire year. About one-quarter of buyers spent $5 or less for the year. Most iTunes users, Forrester says, own fewer than two CDs' worth of iTunes music.

Really, it's as if tens of millions of people each had a big honkin' refrigerator, and put a quart of milk in it a few times a year.

Worse for Apple, Forrester found that the number of monthly transactions per iTunes household was declining in 2006. "It is too soon to tell if this decline was seasonal or if buyers were reaching their saturation level for digital music," the report says.

Apple rebutted Forrester's report, saying that iTunes sales continue to grow. But Apple did not offer specific numbers to counter Forrester's. Jobs' music manifesto certainly confirmed that consumers — people who already bought iPods, for Pete's sake — are simply not buying many iTunes songs.

It's not just an iTunes problem. In January, the International Federation of the Phonographic Industry — the global bureaucracy guarding music copyrights — said that online music sales in 2006 "nearly doubled." Which sounds amazing. Until you get to the part where the IFPI says that sales had tripled in 2005. So the growth rate had slowed.

"Downloads, as a business model for digital music, has failed," Dave Goldberg, VP of Yahoo Music, told a crowd at Digital Music Forum West late last year. "When you look at people who are buying downloads, it is older people who have money and time, and people who are doing it through gift cards."

How about subscription services, like Rhapsody and Napster? Not much joy there, either. Rhapsody reportedly has about 1 million subscribers. The rest, all together, have about another million. That's an audience share that approaches the 0.7 rating Animal Planet got when it aired Puppy Bowl III before the Super Bowl.

It's certainly not that people don't want to buy stuff on the Internet. Amazon.com's sales soared in 2006. Blue Nile is thriving selling diamond jewelry, and eBay sells millions of cars. Getting people to buy songs ought to be a snap.

And people want music. The Grammy Awards on Sunday were a giant celebration of music's popularity. People listen to more music in more ways than ever.

But for the majority of people, downloading songs is too hard and too frustrating. Some of that problem is the digital rights management (DRM) software that limits where and how songs can be played. It makes iTunes songs playable only on iPods, Rhapsody subscription songs playable only on certain devices, and so on.

The record companies believe DRM keeps people from pirating music, which may or may not be true. But DRM definitely keeps people from buying online music. As Jobs says, if consumers could buy music from any online store and play it on any device, the entire industry would thrive.

"The more you try to control music, the more you limit business opportunities," says Steve Waite, author of the book Quantum Investing and a professional musician.

Or as music artist Moby told me last week, "Personally, I see 2% of DRM as protecting copyright and 98% annoying consumers."

There are other reasons downloads are stalled. People who grew up with CDs — or vinyl LPs before that — like the packaging and cover art, and like to get songs deep in an album that are not hits but grow on you over time. At 99 cents a song, digital downloads don't offer enough value to give up the packaged CD niceties.

Especially when pirated music is so easily available for free.

If digital downloads are going to take off, they probably need to be DRM-free, simpler to buy and much cheaper. Then again, that will only happen with the record companies' blessing, and since they get 90% of their revenue from CD sales, maybe they just don't care about taking digital downloads to the mass market.

I guess we'll find that out if record label EMI, as rumored, decides to sell songs with no DRM.

After Jobs released his essay, I asked Apple spokeswoman Natalie Kerris why he chose to do it at that time. She said there was no particular reason. But Jobs never does anything for no particular reason. He manipulates the media and timing better than anyone in tech.

More likely, Jobs realized it was time to save iTunes.