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Of bits and big bucks

Exactly one year ago, on January 7th, 2013, Apple announced that the App Store reached 40 billion downloads[1]. Here are additional data points from that release:

  • 20 billion downloads in 2012
  • 2 billion downloads in December 2012
  • 500 million active iTunes accounts
  • 775,000 apps
  • sold in 155 countries
  • 300,000 native iPad apps
  • over $7 billion in developer payments

This year, on January 7th, 2014, Apple announced a new set of data points:

  • $10 billion spent on the App Store in 2013
  • $1 billion in December 2013
  • 3 billion app downloads in December 2013
  • 1,000,000 apps
  • sold in 155 countries
  • 500,000 native iPad apps
  • $15 billion in developer payments

The obvious:

  1. 225,000 apps were added in 2013
  2. 200,000 native iPad apps added in 2013
  3. App download rate for December increased by 50%
  4. No new countries were added in 2013
  5. $8 billion was paid to developers in 2013 (more than in all previous years put together)

The less obvious:

  1.  No update on iTunes accounts this time but there was a mid-year update (June 10th) which put iTunes accounts at 575 million. iTunes accounts have grown linearly since mid 2011 so it’s quite probable that the current total is above 650 million. Screen Shot 2014-01-08 at 1-8-9.28.41 AM
  2. Given mid-year updates to earnings/revenue and the October 22nd update that 60 billion total apps were downloaded and the May 15th update that 50 billion total apps were downloaded it’s possible to estimate with confidence that there are now 68 billion total apps downloaded and that were about 27 billion app downloads in 2013. This is an increase of 35% in the yearly download rate. As noted above, the December growth alone was 50%.
  3. Given mid-year updates on developer payments, and download rates we can estimate revenues per app have increased. As in-app purchasing has taken off it’s no longer meaningful to assign a “purchase value” to each download. The rate of payments to developers is increasing faster than the download rate. Currently $26 million is paid out every day while about 100 million apps are downloaded daily. Note that the trend lines below are arbitrary: Screen Shot 2014-01-08 at 1-8-9.41.18 AM
  4. As other reports have noted, there was a decrease in music downloads in 2013. This is also evident when backing into a download total for music given the earnings data and the above evidence of app growth. My estimates below may be overly generous for music unit downloads as they also assume lower pricing. Overall gross music revenues through the iTunes music store[2] are flat for the year and may even have begun declining precipitously. App revenues are more than compensating for this. Screen Shot 2014-01-08 at 1-8-9.50.37 AM
  5. The iTunes content economy is grossing about $17.5 billion/yr. Apple’s own software and services (reported as part of the iTunes segment) add another $6.2 billion/yr. The combined total of $23.7 billion/yr. is slightly lower than what Apple net sales were during its fiscal 2007 year or what Amazon sold in 2009.
  6. A complete report on the iTunes economy and pro-forma iTunes income statement is available for purchase at store.asymco.com.

So much for the data. What is really happening?

First, it’s tempting to look at music and suggest that music downloads are suffering from streaming, just as it was tempting to suggest that CD buying was suffering from piracy (and later, downloads.) But this is falling into the trap of defining a product’s use by the metrics used to measure transactions. These metrics are but a proxy for what consumers are actually doing with their time.

Consumers have a fixed time budget, a more rigid constraint than their spending budget. Competition for a slice of a consumer’s time budget is far tougher than competition for a slice of a consumer’s wallet. So what’s amazing is that apps have successfully grabbed a share of this time budget. I believe that the reason they succeeded is that they initially fit into niche time slices that were previously unoccupied.[3]

Downtime or “boredom” was filled with app interaction. This includes some social media consumption. These are not immersive experiences. They are “casual”,  inconsequential and trivial. At first anyway. And that’s the rub. As apps enter a consumer’s world they initially take on non-consumption, which is easy to beat. But as the experiences become increasingly compelling they “move upmarket” and compete more aggressively with existing media consumption patterns.

For instance, one might allow casual gaming to take root in non-consuming contexts such as commuting, waiting, and escaping time niches. But if the experience becomes addictive, the gaming takes over time previously spent watching TV or using console games. The same can be observed for app-based experiences of social media, shopping and chatting.

This is the insidious march of a disruptor. It gains a foothold in a context where it has no competition and then relentlessly gets better, eventually displacing the far better suited alternatives. This is what I believe is happening with apps. They are asymmetric in their competition with established media and as a result they are easily ignored and brushed off as irrelevant competition. That is until the incumbent media sees a sudden drop in consumption. Even then, the culprit blamed is not the upstart but some structural issue.

Music would appear less vulnerable to this app-based substitution because it’s an eyes-free experience and can be easily consumed concurrent with another activity. There is however, a subtle de-emphasis and hence devaluation of the experience as it fades into the background. The “job it’s hired to do” changes.

Second, and relatedly, the other meta-observation is that apps are media. They are produced, marketed and priced in ways analogous to other media types. This has implications for the artist/producer/creator. For them movement into apps is natural and effortless. It’s how developers moved into them without thinking twice. Trouble is that this transition is not at all simple for those who distribute media.

I tweeted that the media industry deplored the shift of “digital pennies for analog dollars[4] as the packaging of their product changed. The angst and trauma suffered by the media industry when dealing with what could be seen as a trivial change in the encoding of content are the stuff of lore and legend. Moving to apps could be even more troubling. Mainly because there is already a distribution channel in place. And it’s owned by a set of companies whose motives and business models are completely different.

The app economy shows that there are big opportunities in “digital pennies” and that the figures are beginning to match even the “analog dollars”. In fact, I suspect eventually digital pennies will dwarf analog dollars. The trouble is that these pennies will not be earned at the same control points. Bits are already big bucks. They’re just not the bits we are used to.

 

Notes:
  1. Unique downloads excluding re-downloads and updated []
  2. Excluding new iTunes radio and revenues from services such as Match []
  3. Interestingly, this was how music, especially digital music as enabled by the iPod, gained traction []
  4. Original quote was made by Jeff Zucker, president of NBC Universal, in 2008 in reference to the future of TV []
  • actualbanker

    Podcasting will take up a tiny percentage of the fall too. Every 35 minute podcast is worth about 10 song-listens… But as podcasts grow people have less time to listen to music. For example by listening to the Critical Path and the Talk Show you taking 3 hours in the week that before might have been filled with music.

    • Guest

      That’s what has been happening to me. I replaced “listening to music” with ” listening to critical path episodes” while I work out.

    • StevenDrost

      True, but Podcasts are just another App.

  • Liberty

    Horace, I believe your conclusion of 8 billion developer payments this year is not supported by the data. We know the developer cut at 70%, and can assume that Apple would have boasted of 11 billion sales. 11 bn equal at most 7.7bn developer payments, so I suspect that last years over 7 billion were close to 8 billion, making this year closer to 7 bn.

    • Ew@n

      Apple 1/7/13 “and developers have been paid over seven billion dollars by Apple.”
      Apple 1/7/14 “Apple’s incredible developers have now earned $15 billion on the App Store.”
      Could that mean, 7.9-15=7.1? Sure. But without additional data, we really should read it as 7-15=8.

      • rounded

        The $15b and the $7b are both rounded down to some extent, yes. Seems suspect to conclude it’s closer to $7b than $8b.

    • Portman

      Or, it’s possible the developer cut is not *universally* 70%. It’s likely the largest apps have negotiated more favorable rates. That would make it possible for 2013 to have both $10b in sales and $8b in developer payments.

      • likely

        “It’s likely the largest apps have negotiated more favorable rates.”

        This is not likely and has never been suggested by anyone in a position to know.

  • Bananaj

    Music listening has always been about accessibility. The concept of “owning” music was never real, consumers were buying access with limits defined by the technology of the time. Part of the current value proposition of music downloads vs streaming is/was reliability.

    4G networks are reducing the value of having an mp3 on the device vs having it in the cloud. The networks are not ubiquitous but eventually they will be. In any case the streaming apps just need to allow high quality local storage of favourite tracks and they can eliminate the entire remaining advantage of “buying”. They are doing this.

    Part of the issue is that the “under credit card age” group are being trained to use audio streaming and video services before they reach the age where they *can* buy. What is the point of buying a hit song eg. Robin Thicke Blurred Lines when you can play it on YouTube at any moment via unlimited 4G?

    The next frontier is convenience – what is the price that I am willing to pay to avoid the inevitable advertisement before the song I want to hear? Do I do it via a bundled subscription or micropayments? Does the OS allow me to run YouTube in the background and replace the audio in, say, my favourite game app? How do I make MY playlists from all the sources I have available to me? Can I share them? Can *I* monetize them?

    There will be a number of “one size fits all” streaming services that have access to most music, and some niche players. The innovation will be on the social side and in the integration with other experiences/brands/apps – these three terms will increasingly become interchangeable.

    • towergrove

      Maybe for some but when I purchase a mp3 I do in fact own the copy. Its in my possession and in face mine. Now the user agreement may say otherwise but thats not the true physical reality of the matter.

  • Frank Vaughn

    My personal shift from my recorded music to Pandora and iRadio is consistent with the shift away from music downloads. I only listen to my downloaded music when I have no signal. I’m buying future iPads and iPhones with less memory as a result. I had over 15GB of music stored on my iDevices. Now it is more like 5GB.

    • towergrove

      If you want to forever rent your music thats fine but still by a long shot most people wont rent but rather will buy their music. Same goes with video.

      • obarthelemy

        I think that’s an age thing. Teens are huge consumers of music, and usually flock to hits for the duration of their hit-iness. No need to buy in that case.

  • jambani

    Horace, have you found any decent correlation between any of the data provided by Apple and actual unit sales of iOS devices? I was wondering what you thought the implication might be for devices sold in the December quarter.

  • http://ValuingDisruption.com/ Bill Esbenshade

    Horace — Lots of great thinking in this article! Makes me think again of the Chromebook, which I’ve been struggling with — Chromebook seems like such a classic low end disruption, and I’ve been concerned about effect of Chromebook on MacBook sales. MacBooks appear to overserve pretty much anyone who only needs a physical keyboard for word processing, spreadsheets, and extensive emailing.

    Strengths of Chromebook are simplicity, affordability, focus on specific jobs that need done (i.e., physical keyboard input for word processing, spreadsheets, and emails). Weaknesses include lack of customization and loss of native apps, and the ability of these apps to accomplish so many specific jobs that need done.

    When you see the massive growth in Apple’s App Store, you start to realize how easily Apple can effectively address Chromebooks — and offer the best of both worlds — by offering an iPad with some type of integrated physical keyboard input (the much-rumored iPad Pro?). This would be a simple, affordable option with the flexibility of native apps.

    Many believe existing iPads are a sufficient competitive alternative to Chromebooks, but I’m not so sure — Apple doesn’t want to just sit back and let Chromebooks slowly take share because many people are overserved by MacBooks. For its ecosystem advantage to stay really strong, Apple needs to make sure it sells a product that doesn’t overserve people who want a simple, affordable product with a physical keyboard — they need a product to address this unmet job that needs done. The rumored iPad Pro may fit the bill.

    • http://www.isophist.com/ Emilio Orione

      There are really a lot of external keyboards for iPad.
      Even Surface that can not be used without a keyboard has the keyboard placed as an accessory and sold separately.
      It is a matter of marketing: for microsoft the reason is to keep to base price lower and the margin higher with a very costly keyboard, for apple the reason is to show that the ipad does not need a keyboard even if apple and a lot of third party vendors does provide keyboards for write intense use.

      There is no need of an ipad pro, just to buy the accessories that fits your needs.
      Google vision is interned centric, apple vision is user experience centric and actual technology says that native code can give a better experience to users and I don’t think it is only a matter of 4g coverage, it is a matter native code power and api power and ad hoc coding that can not be matched by general use everywhere code.
      Which vision will win? iTunes stores numbers are giving a clear response, furthermore user really care about their experience and being educated by apple to expect more, they will demand more. It will just get better and better for apple choice.

      • http://ValuingDisruption.com/ Bill Esbenshade

        Thanks for response, much of which I agree with! I just think people will pay for a simple, affordable, Apple-designed iPad Pro with an innovative, beautifully integrated physical keyboard. One of Apple’s biggest competitive strengths is design, and Apple is positioned best to come up with an innovative solution.

        And if you’re buying this hypothetical product because you want something with a keyboard that’s simple and affordable (like a Chromebook), you may not want to mess with detachable keyboard accessories (and may even lack knowledge of the full range of keyboard options). Many consumers are lazy about these things — these want purchase and use to be as easy as possible.

      • Shameer Mulji

        If Apple does release an iPad Pro, that’s more akin to an iOS laptop, it won’t be as cheap as a Chromebook. That I am sure of.

      • isitjustme

        That depends on which is making the chromebook and the ones made for google is comparable in price to a macbook laptop.

      • charly

        The Pixel has been purposely designed and priced to be not competitive with the other Chromebook manufacturers (or any other laptop). See for example its pitiful storage space which makes it useless offline

      • Kevin

        A keyboard is an inherently unnatural input device. You will never meet a 4 year old who can type on a keyboard.

      • http://ValuingDisruption.com/ Bill Esbenshade

        That’s a great point! I may overweight the importance of a keyboard because I’m an attorney and I type a lot (and am a good typist). Physical keyboards are a bigger deal if you type well, or if you work in a field where you type a lot. Otherwise, they’re probably becoming less important, due in no small part to the iPad.

        I definitely don’t think Apple should try to “cram” a physical keyboard into an iPad type product — they should only do it if it makes good design sense and if it fulfills unmet jobs that need done such as improved affordability, simplicity, or ease of use. For some users, a physical or haptic keyboard could really enhance their experience, but as you note, that’s not the case for many other users.

      • Space Gorilla

        I use an iPad 2 in a ZAGGFolio. The combination of angled touchscreen and hardware keyboard works great, super comfortable. The new ZAGG keyboard cases suck though, I’d lean more towards a Belkin now, great keyboard, multiple angles, and it folds flat when needed. I’m definitely looking forward to a 12 or 13 inch iPad Pro. The key thing with any keyboard accessory is the ability to prop the iPad screen up at various angles, that’s what makes it so comfortable.

      • iObserver

        iPads have physical keyboards, there are about a million to choose from.

      • Can’t Be Everything

        Apple is all about FOCUS. They’re not into making one-of-everything and something-to-suit-everyone-and-anyone. The number of people who need/want a physical keyboard for the iPad simply does not justify Apple’s getting into that. For the few who want that, there are third party keyboards. For those who really need a keyboard and more-precise-than-a-finger pointer, they have the perfect solution: the MacBook line.

      • charly

        But the touch keyboard on ipad is so incredible crummy

      • Walt French

        And the touchscreen on this MacBookPro is totally unresponsive to my pinch and drag gestures. Crummy 2010, overpriced Apple tech.

        That I can’t figure out either how or why I will replace.

      • DesDizzy

        That’s what Siri is for. Siri will get better. Siri is the future.

      • cakedog

        You will never meet a 4yo who can fly a plane, what does that tell you? Absolutely nothing at all. Sure, touch is very intuitive, but most people still use a keyboard to type, because it has a lot of benefits.

      • Kevin

        If you could make a plane that a 4 year old can pilot safely, you’d have a very lucrative consumer aircraft product.

      • charly

        Not really. Piloting the plain is not the hard bit of flying. It is all the regulations you need to follow and setting a course is also not trivial.

      • obarthelemy

        So is a toilet then ?

    • iObserver

      why would anyone get a chromebook or netbook instead of an iPad?
      an iPad can surf the web better AND has native apps and storage, not to mention a laundry list of other features.

      • Walt French

        Chromebook has the appearance of far superior simplicity. The OS can auto-update, so the only thing the user worries about is whether there’s a new format for GMail or etc.

        Reliance on web apps pushes the complexity elsewhere. For some users, that’s fine: they learn GMail and Chrome in 10 minutes and need to know nothing else. It’s true that others have worse internet connections and broader needs so they have to deal with suboptimal solutions in say, a web spreadsheet versus Excel, but they shouldn’t be considering a Chromebook, maybe, as I, would be ill-served on an iPad.

        Every time your mind comes up with phrases such as “laundry list,” think about how a single-function device might be able to displace one, or a couple of the jobs, simpler and easier.

      • krizspec

        The super limited experiance of a chromebook is all available on a iPad, Android or surface with more extra options at the cost of a keyboard accessory, but compairing a chromebook or even a netbook to a full fledged macbook or windows laptop is just crazy I predict the chromebook market will go the way of the netbooks it’s going to crash and burn as soon as people realize they are being scammed with a deal that is too good to be true, you pay very little and you get almost nothing that was true for the netbooks and is true for the chromebooks. Cause why have a gadget for only one use just to need yet another one on the sidelines when you want to do something that isn’t a spreadsheet or browsing.

      • charly

        Netbooks were at least in the West bought as portable laptops. In home they have been replaced by tablets and on the move by smart phones. Chromebooks are not portable (they are move-able but that is something different) and compete with laptops.

      • charly

        Price and form factor are two obvious factors for chromebooks. They are cheaper, have a larger screen and are build as laptops which makes them more sturdy.

        ps. A tablet + a keyboard are not the same as a laptop

      • xynta_man

        Because to most people chromebooks look like regular laptops, i.e. they view them as “real” computers, unlike iPads that for some reason aren’t viewed as “real” computers. Another issue is price, which in the end of a day is still a very important factor for most people — you can get a chromebook for peanuts.

      • obarthelemy

        For the keyboard+mouse/trackpad, cost, and ease of admin.

        “can surf the web better” : Why ? Chromebook offers mouse, bigger screen, choice of screen resolution.
        “native apps”: often not relevant
        “storage”: some chromebooks have HDDs, and all support them via USB.

    • charly

      The iPad Pro which is more expensive than the iPad which is more expensive than the iPad mini which is more expensive than the Chromebook.

      I don’t want to say much but Chromebooks are bought for their price. Selling a product that is twice as expensive in a very price conscious market may be a problem. Doesn’t mean it won’t be successful but it will another market that will buy them

  • sigaba

    “The same can be observed for app-based experiences of social media, shopping and chatting.”

    I think a lot of this would be complementary, people have one thing going on in their handheld experience, and another on their Ten-Foot device (double entendre noted). Gaming is one thing that supplements a video, as may reading; music definitely doesn’t supplement any of these, as you can consume music while doing just about any other app activity. We lack some empirical data on the time budget issue, it’d be a mistake to say that apps are selling through at 10x the rate of music, thus Apps must be grabbing significant user time. Again, if the apps are games, or readers, or video players, sure; if the apps are anything else, it’s a lot less clear. Most of my non-web “consumption” time on my phone is spent in the Kindle and HBO Go apps, they make Amazon and Time Warner huge gobs of money, and their revenue number in these figures is a goose-egg.

    As you say,

    “Music would appear less vulnerable to this app-based substitution because it’s an eyes-free experience and can be easily consumed concurrent with another activity. There is however, a subtle de-emphasis and hence devaluation of the experience as it fades into the background. The ‘job it’s hired to do’ changes.”

    This makes sense but it’s completely speculative, I would argue the “job” changed with the Walkman, and as far as the consumer is concerned, an iPhone downloading AACs is just a better Walkman.

  • http://www.BarnesFamily.com/ davebarnes

    Excellent writing and analysis, as usual.

  • poke

    The rise of in-app purchases is interesting. Apps, like websites, are places. And while you’re visiting them, you spend money. It’s kind of like tourism. It seems that everything is moving from an object metaphor to a location metaphor. You watch videos on YouTube, listen to music on Spotify, etc. Nobody wants to download. Downloading is just waiting in line. But the design of iOS/Android seems to be lagging here. The web was always based on a location metaphor, but it was harder to accept payments and the technology was limited. With apps, it’s harder to visit places, share locations, etc. I think Apple and Google are missing an opportunity here; the app experience needs to be more web-like in this dimension. (The developer experience, too, could be more web-like.)

    • There Is A Downloading Tsunami

      “Nobody wants to download. ”

      Nice theory. But the facts say otherwise. Did you even read the article?? There have been 10 apps DOWNLOADED for every human being in the universe. And the rate of growth of DOWNLOADING is showing no signs of abating. So whatever else you may want to argue, to say that “nobody wants to download” is patently wrong.

      • poke

        People wait in line too.

      • obarthelemy

        Not only in the universe, in the metaverse !

    • iObserver

      I’m not sure your background but there are immense benefits to containing media locally in a device, including latency, quality, reliability, immunity to power and internet outages, and ability to tailor to the specific hardware (as opposed to an internet, hardware-agnostic approach).

      The internet analogue you’re referring to predates iPhone and is called HTML 5… and the iPhone/iPad app downloads in popularity, quality, enjoyment, and ecosystem is wiping the floor with HTML 5. Not to mention HTML 5 is accessible on all Apple devices and still is practically an afterthought.

      • poke

        I’m only talking about making the user experience more web-like, not using web technologies. I don’t think HTML/DOM/JavaScript was ever a good platform for apps, but the web is superior in terms of instant access and the ease with which you can share links. I think this could be implemented with native apps and an App Store, while still storing information locally, providing the same APIs, supporting offline usage, etc. It’s an issue of how it’s presented to the user: a place you visit or an object you download. People tend to conflate the user model with the technology, and miss the opportunity to combine the best of both worlds.

      • Space Gorilla

        But once an app is on my device, when I use it, it feels like a place I visit. It is only an object I download once.

      • poke

        Yes, but getting people to download is a major hurdle, and, even once you’ve done that, many people will have already lost interest. Right now the usual steps are: find app, buy app, wait for it to download, find app again (on home screen), run app. (You can run from the App Store, but if the download isn’t fast, people will go off and do something else.) This “onboarding” process loses users at every step. Once in the app, commonly you need to sign up, etc. Everything creates friction. It’d be much easier if you could just find the app and go into it.

      • Space Gorilla

        I hear what you’re saying, reducing friction is a good thing, but I’m not convinced it’s a huge problem.

      • obarthelemy

        One thing Android does is let you test out an app for 15 minutes with the possibility to ask for a round. Great way to remove a barrier to purchase.

      • abtest

        Need stats from when you A/B tested that.

      • obarthelemy

        I’m not so sure what “native app” means anymore ?

        “Native code” is a fleeting notion: there’s compiled code (which can be written in a number of languages, including cross-platform ones, before compilation), there’s interpreted code (is code compiled from a cross-platform toolkit more native than an interpreted app created in an ecosystem’s bare bespoke dev toolchain ?), there’s several gradients inbetween (JIT compilation, install-time compilation like Google is introducing on Android, …)

        Regardless of the code nitty-gritty, even the native APIs and libraries are often seen through 3rd-party toolkits (Unreal, Unity, …) that are mostly cross-platform too.

        There might be a bigger difference between local vs web apps, but even that seems blurred now that JavaScript is very full-featured, can be persistently stored locally, can be compiled… Back when Facebook made a big deal of having re-tooled their app as more “native”, some web dev outfit wiped up a demo of a JavaScript-based clone that actually seemed to work better (“demo” caveats notwithstanding). Google Docs is (was ?) a massive Web app, now it works offline, and, frankly, it’s quite good and pleasant to use.

      • cleverjoke

        “Google Docs is (was ?) a massive Web app, now it works offline, and, frankly, it’s quite good and pleasant to use.”

        This is a clever joke.

      • charly

        It is an Office type program. How many of them do you know that are a pleasure to work with?

    • charly

      Nobody wants to download because smart phones have no storage.

      • DaveChapin77

        Well for one: Books and music don’t take much storage. And for two, on a flight & driving trip a whole truck load of people want to watch video to pass the time which is facilitated by the fact NAND keeps getting cheaper.

      • charly

        MP3 players with less than 2GB didn’t sell well so i think that we can take that as base. Add the increased bit rate and you are talking about at least 4GB. A movie is at least .5 GB so a small music collection and 8 movies is more than a 8GB phone can store.

      • luckily

        Luckily no good phone these days has 8GB of storage.

      • charly

        16 GB is still a small quality sounding music collection and if you want to have it lossless than you can quadrupedal that.

      • luckily

        Don’t worry, nobody wants lossless music.

      • obarthelemy

        Many have 16GB. Minus some space eaten up by the OS. Then minus apps. Not long to go before you’re counting bytes like on a ZX 81.

    • DaveChapin77

      Actually people DO want to download. It’s the Next Big Thing, haven’t you heard? Except no one calls it downloading. They have a whole set of shiny new buzzwords for it: “Offline access”, “Offline reading”, “Offline viewing”, “Offline playing”, and so on.

      Everyone just forgot that this is just downloading.

  • obarthelemy

    If apps are content like ebooks/music/video, will there be the same cross-platform movement for apps that we’ve seen for the rest ? i.e., technical convergence towards standards, then the progressive disappearance of DRM ?

    • Apple Exclusive

      You can’t read iBooks on non-Apple devices. I don’t expect that nor the apps situation to change any time soon.

      • xynta_man

        A few (quite a lot actually) years ago the same could be said about music from the iTunes Store – it had DRM and you couldn’t play it on a non-iPod music player and in a non-iTunes music application, this changed… with a push from Apple, which would surprise many “young” pundits.

        A regular (i.e. non-interactive) iBook is just an epub file with Apple’s DRM, just like music from iTunes is just an AAC file. If Apple was interested (maybe they are?) and had the necessary rights from the publishers, a DRM-free iBook Store could be a possibility.

      • DaveChapin77

        That’s true for most iBooks but not all. A lot of Tor books, for example, do not have DRM. It’s the publisher’s call whether or not to use DRM on the iBooks Store not Apple. AMZN though with control of this market is pleased as hell to use DRM — in interesting contrast to their stance on DRM for Music, a market they don’t control.

    • Walt French

      I don’t recall the hassles of DRM being mentioned at all in why music is a smaller piece of the consumer’s budget. If that were a major factor, music, which is largely DRM-free these days, would be in ascendancy, while apps and video would be in decline, no?

    • charly

      Will there be the same cross-platform movement for apps that we’ve seen for the rest is a bit of loaded question as i think you already know the answer. Obvious answer is yes as Android apps already run on Amazon, Chines Androids, Blackberry, Windows x86, Ubuntu, Tizen & Sailfish. Only Windows arm, Firefox OS & IOS don’t run Android apps but firefox os apps are already cross-platform.

      ps. Chrome is owned by Google so there is a 99.9% change that it will get Android compatibility, Symbian is in legacy mode, WebOS i don’t know and Android x86 will probably work in a virtual engine on Mac OSX

  • N

    This analysis is excellent as usual and was picked up by Forrune (Apple 2.0 section). Here’s the problem. It’s a large world. Why are there only five of so reliable analysts who understand Apple?

    I understand Apple but I’m not an analyst. I run a media company that I founded because Steve Jobs was my childhood idol. We own a sizable stake in AAPL thanks to no interest being paid by banks on savings accounts.

    In short, why are Apple naysayers larger in number than Apple realists (not fanboys)?

    • N

      One Apple criticism. The iPhone’s keyboard autocorrect has a long way to go. Sorry about the obvious typos thanks to my iPhone 5s.

    • vincent_rice

      You are assuming analysts exist to provide accuracy and understanding – they do not. They are there to support the retail arms of their particular financial organisation and encourage the constant churning of portfolios.

      Many ‘independent’ analysts are nothing more than marketing organisations that promote the agendas of their clients. Naturally Microsoft, Samsung etc. employ the services of such companies. They should of course be ignored.

      Thankfully Horace is neither of the above.

    • Walt French

      @N wrote, “In short, why are Apple naysayers larger in number than Apple realists (not fanboys)?”

      Few analysts actually attempt to provide in-depth understanding. Their job is to catch attention with predictions of whether/how/why the stock will go to $XXX, so that the analysts’ traders will get trade orders from customers who’ll remember seeing something interesting/provocative about AAPL.

      Case in point: this article says nothing remotely relevant to what Apple’s stock price will be at year-end 2013; nothing about the number of iPhones and the gross margins they’ll get and therefore the EPS, anytime before the 6-month holding period that analysts’ followers are likely to hold the stock.

      No attitude to fire up flame wars; no breaking rumors to encourage “noise trading” (trades based on baseless rumors or other pseudo-importance).

      The lack of realism/rationality from most analysts is easy to understand because most people don’t turn to analysts’ writeups looking for it. I’m just not familiar with somebody who looks at underlying trends in the smartphone business the way @Asymco does. Yes, I have a couple of other favorite, non-fanboy sites, but none go into the details as we see here.

      The preponderance of bearishness is a bit more arguable; I’d guess it’s that without the likelihood of iPhone sales (or some other new product) doubling or tripling Apple revenues in the next 3 years, the meme that cheap Androids will undercut the iPhone revenue growth and cap it at current levels, tilts the playing field. This analysis would appear to bear on the importance of quality apps, but just recently Munster declared the quality war to be moot, and the deprecation of the iTunes foundation underscores how Times Change.

      • charly

        It is not only cheap Android but also cheaper iphones and already owned iphones that will cut into revenue and profit

      • Walt French

        All the third-party blogs save the present one seem to be saying that cheaper iPhones would EXPAND Apple’s revenue growth. So I detect some have-it-neither-way thinking.

        But while Apple gives more emphasis to EPS than say, Amazon, the real issue for the stock price is the range of the multiple. Many slower-growth stocks, say Starbucks, trade at higher multiples. The forecast may be saying that Apple EPS growth will turn south, as Microsoft’s seems destined to do soon, but more likely we are faced with a dramatically pessimistic view of the company’s capabilities, a point that very few analysts bother to look at in any depth.

        I suspect that’s why YOU come to Asymco, too.

      • charly

        I meant people will buy 4s instead of 5s priced iphones in the future, not iphones below that.

        Last year was the time to get first time buyers hooked on IOS. The first time buyers left are so price conscious and $150 Android so good that it is a lost cause and the problem that status buyers will leave IOS because of the cheaper phones may even cost more users than it would add

  • jwan584

    Great article.

    I like the time-share argument for media vs. apps.

    That said, I do feel streaming is definitely eating into music downloads.

    Allow me to present myself as a data point.

    I have been an iTunes customer since 2006. Every year I buy a decent amount of songs and albums from iTunes. Last year I joined Spotify. I found it a far superior music discovery service and found myself listening to far more music and of many new genres. For the same time period, my iTunes downloads has been approximately zero.

    If Spotify did not exist, I am sure many of the songs in my Spotify playlist would have been iTunes downloads.

    I expect this to continue in 2014.

  • Walt French

    So we’ve known since 2007—Apple apparently foresaw it in ’04 or so—that iPhones would cannibalize iPods.

    But it’s taken us until ’14 to see that apps on iPhones would displace tunes on iPods. Bravo for being the first, Horace!

    We can presume that Apple was engineering for this some 3 years earlier, too. And that they probably didn’t lay off all the people who craft their products to fit their strategic plans.

    • charly

      They foresaw it in 2004. I would call that bad management as it was obvious from the day of the first flash based mp3 player. IIRC that was 1999

    • obarthelemy

      Just a reminder: Apple originally neither had nor wanted an Appstore for the iPhone.

      • Tatil_S

        Yes, we all know that if the first version of a product does not have a feature, it means the company had no plans to roll out such a feature ever in any future iteration.

        Let’s see. After the original iPhone is introduced, Apple has no plans for an App Store, but developer community along with the early adopters complain loudly about third party apps. In the next few months Apple sees the light. Even though, it was totally unprepared for such an effort, in the next 6, 8 or 10 months, it figures out management and staffing, rolls out the best mobile SDK of its time, decides on the business model of the App Store and completes all of the infrastructure along with the legal, accounting, auditing systems. Wow, amazing feat!… Some fan boys really believe Apple can work miracles, but I did not expect you were among them. :)

      • marcoselmalo

        As an Apple-watcher, I’ve often wondered what the process that brought about the App Store. Third party apps seem so obvious, and it’s not just a matter of hindsight, obviously. Developers were clamoring for an SDK from day one.

        My hypothesis is that there were two factions within Apple, one in favor of apps, and the other against them (based on the idea that simplicity is always better). The second was favored by Jobs, but as a (non)compromise, he “allowed” for web apps. (The parenthetical non and scare-quoted “allowed” meaning that web apps were something outside of Apple’s control unless they severely gimped the browser. Web apps were going to happen anyway.)

        So, Steve said no at some point, probably after development of a SDK was already underway. The outcry of developers gave the pro app camp the ammunition necessary to reverse this decision. Although Steve has a reputation for being a tough manager and very hard on ideas that were not his own, he was know to reverse course or change his mind when convinced by a sufficiently compelling argument.

        So, there was already enough of an SDK ready for polishing at the time Apple reversed the decision. iTMS was already there to be adapted as an app market place (which, imho, is not completely a good thing, because the App Store is plagued by discoverability issues rooted in the music store).

        Anyway, just a theory, if you want to call it that. It’s more of a story I made up to try and fit the facts as we know them, with much interpolation.

      • Walt French

        Just a reminder that Apple ALWAYS deprecates products that it is not yet ready to offer. Watches, iBooks, … I suppose I could construct quite a long list.

      • vincent_rice

        So what?

  • DaveChapin77

    Horace, how would AAPL’s retails sales compare to AMZN if Apple’s retail stores and Online Store were added to the iTunes Store number? 2010 or 2011 AMZN maybe?

    • http://www.asymco.com Horace Dediu

      I could not find any source of data for Apple’s online store sales.

  • i’m so ‘appy

    The fact that this massive growth in App purchases is not headline news on CNBC (whose own app is lamentable btw) is good news for the future of Apple stock imho.

    Paradoxically, in 2012 and 2013 nobody could stop talking about apps. It’s as if everybody got bored of the story just as it was getting interesting.

    Asymco readers have probably been downloading apps for their computers and then phones for as long as they can remember, but for most people iTunes and the App store (why two?) are confusing and slightly unnerving.

    I download most of my mum’s apps for her. But she spends hours playing the free games I put on her tablet. Apps for restaurants, estate agents and taxis are still in their infancy here in France, and the government tries to block most attempts at innovation. That’s why growth will be spectacular over the next ten years.

  • http://twitter.com/matthewwanderer matthew

    The notion that time spent engaged with apps has displaced time spent listening to music is an interesting one.

    I had not thought of this myself as, in my experience, _podcasts_ have steadily displaced music in my own life. The trend started in the pre-podcast era, when I would record programming and time shift it, and has only accelerated as podcasts have become more plentiful.