On the occasion of the one year anniversary of the Apple iTunes store on May 1, 2004, Billboard ran a Q&A with Steve Jobs. Here the Apple co-founder and CEO, who seldom pulled his punches, called the legal music download market before iTunes “dead,” claimed “music companies don’t know their customers,” and took a rather dim view of music subscription services.
“Exclusive: Jobs Talks To Billboard” (Billboard, May 1, 2004)
Ultimately, the digital music revolution would not be where it is today without Steve Jobs, who threw open the doors to iTunes, Apple’s virtual music store, one year ago.
Since founding Apple in 1976, the company chief executive has revolutionized the world with popular innovations such as the Macintosh PC, its widely copied operating system, the mouse and the color monitor. Now he’s done it again.
Before iTunes opened a year ago on April 28, record labels had been searching for an effective alternative to their nemesis: illegal peer-to-peer file sharing networks.
All five majors took a chance on Jobs and his plan to sell songs for 99 cents through iTunes. A year later, music pirates are slowly being converted into music buyers, and some are calling the innovation a possible savior of the beleaguered industry.
“iTunes provided an important glimmer of hope for an industry that was really under siege,” says Cary Sherman, president of the industry’s trade group.
Now iTunes is projected to sell more than 125 million songs per year.
Jobs grew up in the apricot orchards that later became known as Silicon Valley. He still lives there with his wife and three of his four children.
Billboard: When you launched iTunes one year ago, people were skeptical. One year later, iTunes is a huge success. What did it take?
Steve Jobs: When we launched iTunes, the legal download market was dead; it was a failure. There were three things that we were able to bring to it. Many of the legal models had been subscription-based. We felt strongly that people didn’t want to rent their music.
If they were old enough to buy LPs, CDs, cassettes, they didn’t want to rent it, they wanted to buy it. With DVDs, the pendulum has swung from renting your movies to buying and owning them. You’ve got people like Blockbuster hurting.
There needed to be some commonality and simplicity in terms of pricing. We had to work with the labels and convince them that uniformity of pricing in terms of singles and uniformity of personal use rights were paramount to make this work. We fought very hard for that, and we were successful.
The second component was the iTunes Music Store. It looks simple, but it’s a complex piece of technology. Our competitors saw this and thought they could create one of these in a month. It turned out to be a lot harder than it looks.
And then the third thing was marketing. We’ve invested a lot to market iTunes. We see that as an investment we’ll have to continue to make for years to come. A lot of our competitors don’t want to or don’t have the money to make that marketing investment.
Has iTunes helped bring back music into people’s lives?
Steve Jobs: Oh, there’s no question…On the iTunes Music Store, someone has bought over 93% of the songs just once, and that included over a half-million songs. This is not a service that’s just selling the hits. There’s a tremendous breadth, interest in music on the eclectic edge. The most important thing we did is let people listen to 30-second previews for free. People are listening to songs they’ve never heard. When they hear 20% to 25% of the song for free, they get a chance to bounce all around the store.
What is your view on the album as an art form, and to what extent has the personalized playlist displaced it?
Steve Jobs: Well, first, let’s look at the data. Just under half the songs we’ve sold are part of albums. We have given our customers a choice. They’ve chosen to buy half their music as songs and half as albums. I think that’s terrific. And frankly, it surprises everyone, including us.
We thought the album ratio would be less. Now, the way we do pricing is we price the songs at 99 cents but we let the albums float depending on how much we have to buy them for from the labels. The album percentage could be higher if the labels let us price them more competitively. Personally, I’d like to see a $7.99 album. Rather than buy three songs off an album, I think more people would buy the entire album if it were priced at $7.99.
(Interview continues below after jump)
Are there any concerns on your part in terms of wholesale pricing strategies and your ability to keep prices low?
Steve Jobs: The important thing is to keep the price of the single no higher than 99 cents. The customers have told us loud and clear that that’s what they want, and we’re pretty passionate about that.
It’s a little bit of a counterbalance to the labels overpricing the albums, because the customers will just buy the singles. The labels have an incentive to price the albums attractively in light of the 99 cent singles. That’s the key.
The interesting thing is that the music companies don’t know their customers. There’s no direct link. To them, Best Buy is the customer. But we know the customers now. We’ve got a really good feel for some of these issues. We know that the customers think that 99 cents is a really good price for a song, but they don’t want to pay a penny more than that.
Exclusives are increasingly popular on iTunes. One of the advantages is that they’re available before they hit radio or other stores. Will we see more of these on iTunes?
Steve Jobs: We like it and we promote it. I think people see iTunes as an interesting way to break a new record. We’ve got millions of people a day going to iTunes to see what’s new. We had an “American Idol” break an album on iTunes, and it was No. 2 for a week. I think you’re going to start to see more and more of that.
What’s your take on the compatibility landscape of the digital music industry?
Steve Jobs: The only people talking about that are the sour grapes comments from the guys that are losing. I don’t think customers are talking about that at all — they’re just going out and buying an iPod.
CDs and DVDs play in the same devices. Shouldn’t the same level of simplicity exist for downloads?
Steve Jobs: The iPod will load mp3s from anywhere. You can go buy a CD and run it on any jukebox. You can run iTunes on Windows and load these tunes into your iPod. The iPod can take music from anywhere. The iPod had a market share as of last December of 46% of all the mp3 players sold in December. That’s including the $50 players. Most of those are given as gifts, but they’re never used because they only hold, like, 16 songs. If you look at the portable music players that are in use, there aren’t statistics on this, but our guess is the iPod is well over half. And the iTunes Music Store has a market share of 70% of the legally downloaded music in this country.
How do you view the subscription model vs. the iTunes à la carte download model?
Steve Jobs: We have more discussions with the content owners than anyone else. This is something we’ve pursued right from day one. If for $10 a month you could put 10,000 songs on your iPod, we’d like to know about it. But you can’t, because there’s no business model that makes sense for the labels, or the subscription fees you would have to pay are ridiculous. It doesn’t matter what kind of technology we develop or Microsoft develops for something like that if there’s no content to be licensed with acceptable terms to use it. One of the failures of technology companies is that they build technologies thinking everything else will work out. Look at Microsoft’s tablet PC. It’s a terrible failure. Just because you build it doesn’t mean they will come.
Subscription services claim close to 1 million subscribers. Do you see that as a meaningful number at this point?
Steve Jobs: It depends what you’re comparing it to. It’s more meaningful than it was a few years ago, but compared to the number of people who are purchasing music and downloading it, it’s not a meaningful number.
Do you perceive illegal file sharing on peer-to-peer networks as a continuing threat to the commercial digital music industry?
Steve Jobs: There will always be music on the Internet that people can steal. What’s new is not theft. What’s new is a distribution channel for stolen property called the Internet. So there will always be illegal music on the Internet.
We have to offer a far better experience than you can get by stealing music. We have to offer reliable, fast downloads; pristine encoding; we have to offer a phenomenal user interface that lets you sample music and learn about artists.
We have to do it for a really reasonable price, and you have to compete with stealing music; we’re in the early stages of competing successfully with stealing music, and no one’s going to claim that the tide has been turned, but we have a little glimmer of light at the end of the tunnel. And hopefully with a lot of work over the next few years that will grow, and we’ll see the legal download market as 10% of the legal music sold on CDs in the next four or five years.
I think in the course of 10 years, that can be pretty explosive; that it can be much higher in 10 years. I think over time we’re going to make some serious headway. And I think we’ve shown the way, all in one year.
With more than 50 million tracks downloaded on iTunes, how has the consumer adoption rate worked out in the first year?
Steve Jobs: We are selling songs at the rate of over 125 million a year. Ten billion songs are sold on CDs in the U.S. per year. So we’re selling about 1.25% of the legally sold music in the U.S. And while that’s quite an achievement for the first year, it does put in perspective that most music is delivered on CDs. So when you talk about iPods, most of the music on iPods is gotten from people’s CD libraries.
What was made of the Pepsi arrangement? What was the take-away for marketing tie-ins for digital music?
Steve Jobs: I think there’s a good opportunity for marketing tie-ins. You’ll hear more about that.