iTunes Store at 10: how Apple built a digital media juggernaut

After a decade of success, can Cupertino ride the next wave?

Ten years ago this month, a music sector ravaged by Napster and largely ignorant of digital distribution found a savior of sorts in what was then called the iTunes Music Store. With its 99-cent unbundled songs, the service quickly became the only significant source for acquiring music legally online.

With iTunes, Apple had drawn the blueprint for distributing music, movies, books, and apps over the web. By supplying and tying together a music player, online store, and song-mangement software, Apple drastically simplified the entire music experience, defying the odds to build a music-retailing dynasty even as file sharing skyrocketed. A decade ago, Apple started to answer what would become an all-important question: how do you get consumers to pay for content again?

"They invented the digital music business," said Michael Nash, the former digital chief at Warner Music Group. "Apple really created the convergence of music and technology and showed everyone what the connected economy around content looks like."

Now known simply as the iTunes Store, the music, movie, TV, book, and app marketplace celebrates its 10-year anniversary on April 28th. Few should be singing Happy Birthday with more zeal than those at the major entertainment companies. And now, as the iTunes Store enters its second decade, there’s a growing sentiment that iTunes has become bloated and stagnant, that Apple is resting on its laurels and failing to innovate while a new generation of music services begin to find an audience. Over the next ten years, will the company be able to evolve its longstanding business model and keep dominating in the face of upstart competitors?

A new model

In the early 2000s, web piracy began to mushroom and digital music services launched by the large record labels — MusicNet and Pressplay — were busts. There was a "scramble in the music industry to create a service to answer the marketplace," according to Paul Vidich, the former executive vice president of Warner Music Group and the first label exec to cut a licensing deal with iTunes.
In April of 2003, the iPod was already drawing intense consumer interest — Apple claimed the device was the number one MP3 player in the world with over 700,000 sold. (For context, Apple sold 5.6 million iPods in the last quarter, despite the continued downturn in the MP3 player market.) Getting content for that iPod, however, was a bit of a mess — it seemed nobody knew how to build an easy-to-use web music service. Napster may have shut down in late 2001, but P2P music sharing was already out of the bag — and the options for legally acquiring music online were poor.
However, Apple aimed to change all that with the iTunes Music Store, the first real a la carte download music service, built directly into the software. At launch, it was Mac-only and offered a relatively tiny catalog: 200,000 songs (it currently has 26 million). But it did have the support of the major record labels of the day: Universal, EMI, Warner, Sony, and BMG. The partnerships were key to helping Apple take control of music distribution — without the songs, the iPod was a nicely designed but empty box.
Steve Jobs' salesmanship helped close those deals. Vidich remembers the Apple CEO flying to New York to demonstrate iTunes for Warner execs sometime around September 2002. CEOs didn't often handle product demos but Jobs "was so exuberant about iTunes and its simplicity," Vidich said. "We were too. The other products out there just weren't simple to use."
Jobs certainly had his challenges. Vidich said he's the one who suggested that iTunes charge 99 cents per track and he remembers Jobs nearly hugged him. At the time, Sony Music execs wanted to charge more than $3 a track, according to Vidich. No doubt a $3 song price would have tied an anchor around iTunes' neck, stifling growth. 99 cents, on the other hand, was below the sub-$1 psychological barrier — and has continued to be an important price point for not only music but the wide swath of 99-cent iOS apps in the store.
 

Eventually all the major record companies signed one-year deals, and at the conclusion of the store’s first year, the labels found themselves captives. iTunes sales had grown so fast and the buzz was so electric that Jobs held all the leverage in subsequent negotiations. Apple sold one million songs in the first week and 10 million by September of 2003. In its first year, the company sold 50 million. "If you were in that space and you weren't supplying iTunes," Vidich said, "you weren't cool."
Apple’s most important move to make itself cool was to create of one of the most memorable ad campaigns of the last decade: the famous dancing silhouette ads.
In contrast to Apple’s typical spots focusing on simplicity and design elements, its iPod / iTunes ads featured loud music, quick movements — and no clear shot of the product itself. The ads sold you music and white earbuds, with the rest left to your imagination. When the iPod was first released, those white headphones were an exotic rarity that pointed to someone carrying a piece of bleeding edge technology — but after Apple’s silhouette commercials, they soon became a constant reminder of Apple’s dominance in the music world.
 
By Nathan Ingraham 
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