This week, Apple (NASDAQ:AAPL) announced that it is shutting down iTunes. It will be replaced with a music app, among other things. Over the years, iTunes has gradually shifted from a killer piece of software to a bloated and frustrating mess. Still, iTunes shutting down marks the end of an era and also raises a pressing question for AAPL stock.
Will Apple be able to regain its leadership position in digital media?
Or has it been left permanently in the dust by more nimble rivals such as Spotify (NYSE:SPOT) in music and Netflix (NASDAQ:NFLX) in video?
iTunes, A Key Part of Apple’s Revival
Apple launched the first version of iTunes just months before it started selling its iconic iPods. Young readers may not recall, but it was in fact the iPod, not the iPhone, that saved Apple from its disastrous decline at the turn of the century. The iPhone would lead AAPL stock to glorious heights. But none of it would have been possible without the synergistic iPod and iTunes combo paving the way.
In 2003, iTunes made a huge leap forward by beginning to sell music. Until that point, it was virtually impossible for a consumer to legally purchase from a variety of record labels. With the iTunes digital store, people could finally buy everything they’d find in a record store — and more — without breaking the law.
While the music industry continued to slump, iTunes helped slow down the crippling wave of music piracy. For a decade or so, it enjoyed boom times. The record labels were happy to have another source of revenue, and people enjoyed access to virtually all recorded music in just a few clicks.
Over time, Apple built on the success of the iTunes store, adding other products as well. For awhile, it managed to sell a great number of movies. It even had a robust business selling individual TV episodes often for $1.99 a pop. Apple, not surprisingly, collected a huge chunk of these digital media revenues. Back then, a hot music single, for example, could sell hundreds of thousands a copy a week. Apple generated a great deal of incremental revenue from this.
Apple Misses the Rise of Subscriptions
However, as good as the good times were for the iTunes store, they weren’t meant to last. Here, interestingly, is a fine question of former CEO Steve Jobs’ strategic intuition. In 2003, he said that listeners “Didn’t want to rent their music.” About the subscription model for music, he said it simply “doesn’t fly with customers”.
After Jobs’ passing, Apple dutifully stuck with the own, not rent, model for music, movies and other digital media. However, one would have to wonder if Jobs would have figured out that consumer preferences had changed in time for Apple to assume a leadership position in the new playing field. Tim Cook certainly didn’t. His oversight has left the company in a far worse position as media has transitioned from digital ownership to subscription models.
In 2014, Apple acquired Beats Electronics, which included the fledging music service which was later to become Apple Music. Alas, this move was years too late. Spotify had launched years ago, and was already picking up considerable momentum as its American listener base took off.
Apple Stuck Playing Catch-Up
With iTunes and the iPod, Apple basically created the digital music scene. There were a few MP3 players before the iPod but they had grave limitations. And there was no digital jukebox or music store close to 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). Apple, thanks to its unimpeachably strong brand at home has become a strong rival to Spotify within the U.S. But it is getting killed in Europe and emerging markets where the iPhone lock-in effect isn’t nearly as strong. Spotify has a huge brand advantage in many of these markets.
In video, things look even worse. The Apple+ TV service is coming later this year. The company will spend heavily 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 that doesn’t have enough going on to keep up with the leaders in video streaming.
iTunes’ End Shows Problems With AAPL Stock
None of this suggests that Apple is a bad company or that AAPL stock is destined to flame out. But even the company’s proponents must admit that the creative spark has largely been lost since Cook took over. The company has produced few truly innovative products or services in years. Apple continues to live off the largess it earns from the iPhone. That can potentially continue for quite a long while.
But at some point, the company will need to come up with something new. The current services push is great for keeping revenues steady, but it is still reliant on owning the iPhone ecosystem. With the iTunes store, it had a great business model (capture a big portion of every sale with minimal overhead) that drew revenues from everyone, not just iPhone owners. Sadly, that easy cash flow is now lost to Spotify and Netflix as the iTunes era winds down.
Ironically, after several years of no news, Apple announced a brand new updated iPod. That may be great for some near-term profits, particularly if they can cash in on people’s nostalgia. But this sort of “innovation” will do little for AAPL stock. They can’t keep letting newcomers like Spotify and Netflix steal their established markets if they want to remain the world’s leading consumer tech company.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
