This is why Steve Jobs allowed Spotify to kill iTunes downloads

It’s becoming more and more clear that music downloads will be replaced by streaming. Spotify even shut down its downloading service recently, probably because of the low download volumes (it says it might bring it back). This chart clearly shows that the iTunes store as a music shop reached a peak, and will probably start to decline soon.

But why did Apple allow its iTunes store to be challenged by streaming services? Didn’t it see this shift to streaming coming? You’d expect this.

Apple is famous for innovating and disrupting, even at the expense of its own successful business lines. Do a Google search for “Apple is killing the iPhone” and you’ll see what we mean.

A new entry into the crowded music streaming service shed some light on Apple’s unwillingness to adapt to this trend. In an interview with AllThingsD, Beats Electronics CEO Jimmy Iovine, a friend of Steve Jobs explained why the Apple CEO didn’t want to launch a streaming music business:

In 2002, 2003, Doug [Morris, former Universal Music head] asked me to go up to Apple and see Steve. So I met him and we hit it off right away. We were really close. We did some great marketing stuff together: 50 Cent, Bono, Jagger, stuff for the iPod — we did a lot of stuff together.

But I was always trying to push Steve into subscription. And he wasn’t keen on it right away. [Beats co-founder] Luke Wood and I spent about three years trying to talk him into it. He was there, not there … he didn’t want to pay the record companies enough. He felt that they would come down, eventually.

I don’t know what [Apple media head] Eddy Cue would say — I’m seeing him soon — but I think in the end Steve was feeling it, but the economics…he wanted to pay the labels [for subscriptions], but [the fees were] not going to be acceptable to them.

Of course, it might be that Jobs was just very astute at seeing when business had potential to be (very) lucrative, and when it was too low margin to bother.

In a famous piece on GigaOm, Michael Robertson last year said that services like Spotify “can never be profitable”, because the record labels (the “hotdog supplier”) can unilaterally impose the terms of the deal:

Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store.In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance.

If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.

Would this imaginary hot dog establishment be able to generate a profit? Never, because the economics are one-sided.

The supplier will always elect the formula that captures the largest amount of money for themselves, completely disregarding the financial viability of the store. If the store miraculously managed to generate a profit, the landlord would simply raise the rates after two years.

Taking a 30% cut from a song download is a lot more comfortable than the scenario that Robertson describes.

Via AllthingsD, photo ssoosay, Flickr

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Raf Weverbergh

Editor of whiteboard. Raf Weverbergh was a magazine journalist whose work appeared in magazines like Rolling Stone, Playboy, Mail on Sunday, Publico and South China Morning Post. He is the co-founder of FINN, a corporate communications agency where he advises startups and multinationals on their PR and Mustr, the easiest media database for PR professionals. You can contact him on Twitter, Linkedin or Skype (rafweverbergh).

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