Digital Squared: Living in an iTunes World

There's an important lesson in Apple Computer's phenomenal success with iTunes. It's understanding that the digital acquisition of digital products is a new megamarket.

The success of Apple Computer's iTunes venture is a harbinger of something big. In the first two weeks, Apple supplied nearly 2 million songs to be downloaded onto personal computers all over the world, at a cost of 99 cents per song. Assume for a moment that Apple continues to sell 1 million digital tracks per week for the next 12 months. By next year, the company will have collected nearly $52 million in revenue to divvy up between the partners in the enterprise. That is the beginning of a real business.

Three years ago, it would have been difficult for Apple to start up iTunes, in large measure because so few homes were connected to the Internet at a speed greater than 56K. Today, roughly one-third of all U.S. residences with Internet access are connected at DSL speed or higher, and as the Wi-Fi revolution spreads, that figure is likely to spike again. By 2005, the number of U.S. households equipped with high-speed Internet access could increase to something like one-half.

As in other media businesses, the halfway point in distribution marks the crucial dividing line between the possibility of success and the probability of failure. When half of the country is wired for broadband Internet access, the business of digitally acquiring all kinds of digital products becomes, like Apple's iTunes, a real thing.

We already know that Americans and Europeans are mad for digital acquisition. Amazon has 40 million customers digitally acquiring physical products. EBay has 61 million people digitally acquiring and auctioning off physical stuff every day. And those are just the big brand names of the Internet world. There are thousands of other well-known and lesser-known companies that rely on their Web sites to move products all the time.

What has long seemed much more iffy (from the consumer's point of view) is the digital acquisition of digital products. We use Netflix to order DVD movies online, even though they could be delivered in digital format over the computer. We still buy the latest Sheryl Crow CD at Best Buy or from Amazon, although now we can download songs with iTunes. We can only get new games for Xbox and PlayStation 2 at the mall. We do all of this because, until iTunes came along, no customer-friendly company offered a reliable service that delivered those products straight to our home computers.

What all technology companies have in common is a desperate need to increase revenue. And enabling the digital acquisition of digital products is a vehicle to that end, as is the creation of a Wi-Fi country. It is in Dell Computer's and Hewlett-Packard's interests to produce personal computers that make it easy to burn your own CDs and DVDs. It is in Intel's interest to build ever-faster chips that enable computers to burn CDs and DVDs more easily. It is in the phone company's interest to get more homes linked to the Internet at very high rates of speed. The interests of all of those key industries are conspiring to create a vast marketplace for the digital acquisition of digital products.

The missing piece, of course, is the content-providing community, which has been battling digital distribution tooth and nail since Napster. ITunes' success should now make every company, from gaming outfits to television networks, warm to the possibility. For recording artists like Bruce Springsteen, every concert can be remixed and sold as an album. For cable-television networks such as A&E and The History Channel, documentaries that have been sitting on a shelf can become profit centers.

A friend of mine recently left RealNetworks to start a digital acquisition - digital products venture. He doesn't have a name for his company yet, but he has already made the rounds in New York to talk to leading content providers such as Major League Baseball and a slew of cable-television networks, and the response has been overwhelmingly positive. They did not view his offer as a copyright issue. They saw it as another revenue stream.

And that's the difference between living in a Napster world and living in an iTunes world. Once content providers see that the digital acquisition - digital products world is just another revenue stream, then all of the forces necessary to create a megamarket will be in place. Everyone knows that 10 years from now, digital-digital will be a huge business. The only questions now are how quickly we can get from here to there and, more important, who gets there first.

John Ellis (jellis@fastcompany.com), a writer and consultant, works in media, politics, and technology. Read his weekday musings on the Web (www.johnellis.blogspot.com).

Add New Comment

0 Comments