Apple Inc. (AAPL): An End to iTunes Downloads? Not This Decade!

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Digital Music News ignited a firestorm among music fans — especially those who buy their music from iTunes — when the publication reported that Apple Inc. (AAPL) was preparing to pull the plug on selling music downloads within two years.

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The vitriol unleashed against Apple that this story unleashed was so intense that it led to the company issuing a rare direct denial, responding directly to Digital Music News the following day:

“Our response is that it is not true, we are not shutting down iTunes downloads per your story yesterday.”

Why the Rumor Was Plausible

There are plenty of Apple rumors out there every day, but many of them are rather far-fetched and thus taken with a huge grain of salt.

The possibility of Apple iTunes ditching paid music downloads struck a nerve not because Digital Music News cited sources “with close and active business relationships with Apple” –that is a frequent mantra on Apple rumor sites — but because of a confluence of events that add credence to the possibility.

Throw in Apple’s history of disrupting the music industry and ruthlessly pruning its own products, and you have the perfect recipe for a massive iTunes shakeup.

The first supporting point is the decline of online music sales. According to RIAA stats, digital music download sales in the U.S. declined from $2.8 billion to $2.3 billion last year. In its story, Digital Music News zeroes in on worldwide iTunes music sales, which it says are on a pace to slide 25%-30% over last year, with projections it would drop to $600 million in 2019 (from a high of $3.9 billion in 2012).

In other words, if iTunes music sales weren’t a drop in the bucket for AAPL already, they will be.

Second, the launch of Apple Music has made an increasingly public mess out of integration with existing iTunes libraries. Controversy continues to flare over purchased iTunes tracks and personally ripped MP3s allegedly being deleted from hard drives when a user signs up for Apple Music. Those affected still have access to their purchased music via Apple Music, but if they cancel the service, the Apple iTunes downloads they paid for are gone.

Third, Apple is the poster child for music industry disruption. Apple iTunes downloads are blamed (or credited, depending on your viewpoint) with killing the traditional music store, decimating CD sales and ushering in the age of paid digital downloads. If Apple has upended the music business model once, it could do it again.

Finally, Apple has a history of killing off products, even those that are still making money. From the Newton to the iPod Classic, if it is seen as cannibalizing sales from another product or doesn’t fit the company’s current vision, Apple has had no qualms about axing it.

And yet …

Why Apple Would Be Stupid to Halt iTunes Music Sales

If the digital downloads through Apple iTunes do fall to the $600 million level within a few years, that is indeed a drop in the bucket for AAPL, but it’s still revenue — revenue that doesn’t cost AAPL much money to earn. The infrastructure — from payment to download — is already in place, and there really aren’t even marketing costs. The record labels handle that.

More importantly, abandoning digital music sales would create a very sticky situation on the Apple iTunes front. Whatever technical problem the company is having with Apple Music not playing nice with purchased tracks would not go away. Those purchased downloads will still be there. Apple would likely have to embark on a project to either separate Apple Music from iTunes, or export purchased music to a new app (one would be needed for both iOS and OS X) so buyers would still be able to play those tracks they bought.

Abandoning iTunes music owners to their own fate would be a PR nightmare. They’d have to export their music library to an alternative and with the dominance of iTunes, there isn’t exactly a huge selection of third party Apple-compatible music library/player software out there.

If Apple were to make any move that was interpreted as abandoning those who paid for music through iTunes, the move could decimate consumer confidence in digital downloads.

Most services include legal language that essentially defines the transaction as rights to the file (as opposed to actually owning the copy), but from a consumer perspective, they paid for the music and they own it. Pulling the rug out in any way would hurt not just Apple, but any company that sells digital files, from movies to e-books.

I’m not saying Apple will never stop selling music through iTunes, but I don’t see it happening any time this decade. Any problem that doing so might help address only leads to even bigger problems.

In the long-term, it may happen, but it will require extremely careful planning and a cautious approach.

In the meantime, that revenue is still useful.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/apple-itunes-aapl/.

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