ITUNES IN THE NETWORK, KNOWLEDGE & ATTENTION ECONOMIES

Examining Apple iTunes Store Methodologies and the Fundamental Economic Basis of Internet Commerce

APPLE ITUNES WEBSITE

ITUNES DESKTOP APPLICATION CONTAINING YOUR PERSONAL ALBUM COLLECTION

HOW DO NEW RULES FOR THE NETWORK ECONOMY APPLY TO ITUNES STORE?

Rule 1 - Law of Connection iTunes use the Internet to serve content to millions of

computers & attached music players iTunes Store website content integrated into the iTunes

Desktop application, purchase songs etc, easy to use Connects producers of 10 million recordings via the

Internet to 125 million iTunes Store customers Empowers distributed artists & content producers to

create songs & applications, publish songs and generate revenue from each download

Brings manufacturers and customers together

ITUNES STORE CONTENT INTEGRATED INTO DESKTOP ITUNES

APPLE CORPORATION INCOME & PROFIT

Net Sales,$36,537M

Gross Margin,$17,222

Net Profit,$5,704

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Apple Sales & Net Income

Source data Apple.com

RULES 2 & 3 - LAWS OF PLENITUDE & EXPONENTIAL VALUE

Slow to start, but success occurs Success breeds success, more songs, more iPods,

more downloads, more songs and so it goes. Revenues begin to soar

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Monthly Dowload Trend Line

ITUNES STORE WEB SALES

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iTunes Web Store Music & Other Download Sales

iTunes Store Music & Other Download Sales

Source data Apple.com

RULE 4 – THE LAW OF TIPPING POINT

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Add Windows support

iPod price

drop

Tipping point

Tipping Point – 3 factors •iTunes store – Apr 2003•iTunes for Windows PC – Oct 03 •iPod price drop & new models in 2004-5

iTunes Store Opens

RULE 5 - LAW OF INCREASING RETURNS

Apple’s gross margin % has increased over the last 5 years from 29% to 47%

More iPods Sold

More Downloads

More Revenue

More Commissions Paid

More Songs Written

More Attraction

iTunes Store

ITUNES STORE DOWNLOADS & INCOME SPLIT

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iTunes Store - # Millions of Songs Downloaded per Mth &Estimated Nett Song Revenue After Royalties Paid to Artist. $M per Mth

# Songs Downloaded / Mth

Net Income After Royalties $M / Mth

# of Song Downloads per Mth

Net Song Income After Royaltes Paid $M/Mth

Area Between the lines is the Commission paid back to the artists

RULES 6 - THE LAW OF INVERSE PRICING

Moore’s Law: CPUs double in power every 18mths Gilder’s Law: Comms Bandwidth triples every 12

mths. Metcalfe’s Law: Value of a network increases to the

square of the number of nodes. iTunes songs are cheap compared to CDs $0.69,

$0.99, $1.29 & $2.19 / song vs. $15 - $29 for a CD. Price of Knowledge & Creativity Increases. Price of H/W drops. iPods got smaller, more

features and dropped in price. Demand increases, sales increase.

RULE 7 – THE LAW OF GENEROSITY

Free iTunes Desktop Music Catalogue

Free 30 Sec sample Free Pod casts Free Song of the week Free Samples

Customers Give iTunes Gift Cards as Christmas Gifts

HOW DO NEW RULES FOR THE WIRED ECONOMY APPLY TO ITUNES

Law of Allegiance Passionate Apple devotees Apple used ACC (m4a) copy protected music format vs.

open mp3 format. A big gamble that paid off. Expand to Windows customers

Law of Displacement Increase the digital warehouse Add another webserver, hard disk array or switch iPods are smaller, hold more songs, play & take videos Download more & varied content iPod prices dropping, features increasing iPod Touch, iPhone & iPad apps

IPOD TOUCH ATTACKS THE HANDHELD GAMING MARKET – ITUNES FOR GAMES

RULE 9 – THE LAW OF DEVOTION

Apple customers are typically arty, fashion & style conscious, and often non-techie where ease of use is important

Compared to IBM & compatibles, Apple had a small club devotees dedicated to the brand.

Fan base now covers Windows & Mac customers Download customers are devoted:

Music Fans Movie Fans Gamers

Personalisation

IPOD SALES BECOMING A SMALLER PART OF APPLE’S REVENUE

Zaky, A. 2010

RULE 10 - LAW OF DISPLACEMENT

Add another webserver, hard disk array or switch iPods are smaller, hold more songs, play & take

videos iPods run applications, play games & movies iPod prices dropping iPods are being displaced by iPhones Yet iTunes Store continues to grow Information is power, digital assets increase in

value

RULE 11- LAW OF CHURN

iPods became smaller in size & price Now an ever decreasing part of Apple’s revenue stream.

iPod wave is crashing. Replaced by iPhone & iPad. Whilst iTunes Store continues to grow with expanded

range of content, inc. Music – all genre Podcasts, Talking Books & Education Series Movies, TV Shows, Applications & iBooks

RULE 12 - LAW OF INEFFICIENCIES Apple are releasing new products, iPhone, iPad and

soon iTV So slow down on building better iPods Build new products to compete in other markets Develop new market segments that leverage benefits

from the iTunes Store. Downloadable Applications Downloadable iBooks, Movies & Television

MANUFACTURING ECONOMY VS. KNOWLEDGE ECONOMYOld Paradigm – Manufacturing Economy New Paradigm – Knowledge Economy

1. Key factors: capital, resources & labour 1. Rising importance of knowledge and creativity

2. More efficient application of existing resources

2. Addition of knowledge-based industry and knowledge-based parts of resource activity

3. Predominant focus on national markets 3. Firms going global and subject to global competition

4. Primary focus on cost competitiveness 4. The imperative to deliver superior value to customers through innovation

5. Relatively long product cycles 5. Trend to shorter product cycles

6. Getting more out of existing businesses 6. Creating new businesses and a premium on risk-taking and entrepreneurship

7. Reliance on traditional capital resources, such as loans and stock market equity

7. Venture capital as central to new business development

8. Focus on individual achievement 8. Shift to strategic alliances and other forms of collaboration such as networks and clusters

Flew, T. 2008.

TRANSITION FROM THE MANUFACTURING ECONOMY TO THE KNOWLEDGE ECONOMY

Disintermediation of traditional manufacturing and sales processes.

Knowledge is power. Internet distributes information and knowledge flows Knowledge is transferred to the customer to make

informed choices. Removal of wholesalers, distributors and retailers

from the sales process. Customers deal directly with manufacturers

ITUNES &THE ATTENTION ECONOMY

World of over saturated media, bombarded by advertising

Limited spare time to read, relax or research Money flows towards attention How to get noticed in the Attention Economy iTunes & Attention Economy

6 – 35 year olds love music and video, actively seek it Dominant market share, 70% of online music sales Artists & record companies provide their own marketing Web2.0 end-user feedback, reviews, ratings, social

media marketing. Fans selling to fans. No lack of attention here

DISINTERMEDIATION FOSTERING ONE TO ONE RELATIONSHIPS BETWEEN PRODUCERS & CONSUMERS

Artists, Record Companies, Movie Cos, App Devs See iTunes a friendly & rewarding channel to market. A place to build their brand (get Attention) 70% commission paid to the creator/artist (ensure supply) Slows piracy and provides income to the artist Happy content providers, produce large amounts of new

content, resulting in happy customers & happy artists.

SUMMARY

Network Economy – Connectedness of many

Knowledge Economy – Creativity of many

Attention Economy – Multi-Channel Marketing facilitated by distributed marketing, Create Fans & get noticed. Wealth flows towards

attention.

REFERENCES Apple. (2010). Apple Inc. Images & Screenshots. Retrieved July 10, 2010,

from http://www.apple.com/ Apple. (2010). Apple Inc. Financial History: Annual Reports & Financial

History. Retrieved July 10, 2010, from http://www.apple.com/investor/ Brooks, A.(2010). iTunes Continues to Dominate Music Industry.

Retrieved July 25, 2010, from http://news.worldofapple.com/archives/2010/05/27/itunes-continues-to-dominate-music-industry/

Flew, T. (2008). The Global Knowledge Economy Oxford University Press Retrieved July, 10, 2010, from http://edocs.library.curtin.edu.au/eres_display.cgi?url=dc60264108.pdf&copyright=1

Goldhaber, M. (1997). The Attention Economy and the Net. First Monday Retrieved July, 19, 2010, from http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/viewArticle/519/440

Kelly, K. (1997). New Rules for the New Economy. Wired.Com Retrieved July, 10, 2010, from http://www.wired.com/wired/archive/5.09/newrules_pr.html

Zarky, A. (2010). Special Report: The end of Apple’s iPod era. Appleinsider Retrieved July, 10, 2010, from http://www.appleinsider.com/articles/10/07/02/special_report_the_end_of_apples