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Napster to iTunes - Apple's Domination in Music

Companies continuously struggle to understand their customers and deliver products to the market. Marketing, according to the American Marketing Association, is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.

This is what companies are supposed to be doing with their products. In olden days, buyers and sellers would congregate face-to-face in the market square by the castle walls. But in our modern world, getting products like music CDs to customers requires difficult logistics to first estimate sales volumes, and then ship from factory to distribution centers to independent retailers, with the hope that the stores will display and promote the discs in sync with the national advertizing campaign.

Then, at the turn of the millennium came the dawn of digital distribution, and the original Napster. This should have been a marketeer's dream, the ultimate gift to the recording industry from music fans -- A pre-built electronic market square, created by a self-organized group of enthusiastic consumers, coming together to communicate, deliver, and exchange, based on their love of music (and incidentally providing detailed information about their interests).

But instead of taking advantage of the opportunity, the recording industry chopped up Napster with lawsuits, only to see new versions of sharing services regrow, hydra-like, which then needed to be cauterized with even more lawsuits, ad infinitum.

To push the metaphor, instead of building on Napster to promote music and nurture digital distribution, the recording industry redefined its role into an endless Labours of Hercules, suing not only its impassioned customers (and grandmothers in the line of fire), but also visionary entrepreneurs who wanted to grow new businesses around music.

The result, of course, was to allow Apple innovate its way into dominating digital music with the Apple iTunes store, making a very nice business out of selling inexpensive music (and video) to promote its quite profitable sales of iPods and now iPhones.

And now the latest data from The NPD Group shows that Apple has increased its strength, not just in digital music, but in the entire retail music category -- iTunes has 25% of the U.S. retail music market, with Walmart second at 14% and Best Buy third (in music units sold). Apple's share has grown from 14% in 2007 and 21% in 2008.

Apple also continues to lead in digital music in the first half of 2009, with iTunes at 69% of consumer downloads, followed by AmazonMP3 at 8%. In old-fashioned physical CDs, Walmart leads with 20%, followed by Best Buy at 16% and Target and Amazon tied at 10%. (These numbers are based on consumer tracking, and exclude ringtones and subscription music.)

For the moment, CDs remain the most popular format for paid music purchases with 65% of all music sold in the first half of 2009, compared to 35% for paid digital downloads, which has grown from 20% in 2007 and 30% in 2008. But NPD predicts that digital music sales will nearly equal CD sales by the end of 2010.

That's what happens when you look a gift horse in the mouth -- and then reject it. Instead of managing the market by working with the original Napster, the recording industry handed the reins to Apple. That horse has left the barn.

Manifest Tech Site