The average person doesn’t spend much on music at iTunes, the world’s biggest music store, but iTunes itself generates an incredible amount of revenue.
Analyst Horace Dediu estimates the average iTunes account generates $12 in music sales. The chart published on Dediu’s blog makes clear music spending has consistently fallen over the last six years. As Apple has added more iTunes accounts, average annual music spend fell from $42 in 2008 to $20 in 2010 to $12.
The median annual music spend is probably higher than $12. If one assumes not every iTunes account has purchases music -- a reasonable assumption -- then some of the 575 million iTunes accounts represent no spending at all. So, accounts that are buying music are spending more than $12 a year. The fact that some family members share accounts means the average spend per person is less than $12 a year.
The total spending per iTunes account is $43 per year across all media, says Dediu. At 575 million iTunes accounts, that works out to $24.7 billion of consumer spending at iTunes per year. The average iTunes account's annual spending on software has followed music's trend, falling to $9 from $42 in 2008. However, average annual spending on apps has gone in the opposite direction, rising to $16 this year from $7 in 2008.
iTunes accounts for a large portion all of global spending on digital music. At the $12 per account estimated by Dediu, the 575 million iTunes accounts result in $6.9 billion of annual consumer spending on music. That number is roughly three-fourths of global consumer spending on digital music in 2012, leaving some room for other retailers and subscription services. Trade value of the global digital music market was $6.9 billion in 2012 (35% of the $16.5 billion recorded music market), according to the IFPI. Assuming record labels get 60% of the retail price (that's admittedly a rough estimate), $6.9 billion of trade revenue is equal to $9.3 billion of consumer spending.
The trend in average account spending is equally important as how much each account generates. As I noted in a post last week, geographic expansion and market penetration can explain the declines in annual music spending. Average annual spending on music is likely to decline as iTunes expands from wealthier nations to less wealthy ones. iTunes has expanded to many countries in the last few years, including India, Russia, Turkey and across Latin America.
In addition, annual spending on music will decline as more consumers within a particular market adopt iTunes. Early adopters were more avid music consumers and buy more music than other consumers. Later adopters are much more casual music consumers and spend less on music. Thus, it's only natural for the average spending per iTunes account to decrease over time.
Taken together, the average annual spending and the trend in average annual spending provide a learning lesson: for music service to achieve anything close to the scale of iTunes, they must be priced lower than the current prices of $7.99 to $9.99 per month ($95.88 to $119.88 per year). But these services, by their very nature, may not reach iTunes' scale. The fact that the average iTunes account generates $12 on music annually implies many people are casual music consumers who may not appreciate the value proposition of an all-you-can eat subscription model.