iTunes Product and Pricing Changes
iTunes has already demonstrated amazing success for Apple. In June, iTunes became the third largest US retailer of music behind Wal-Mart and Best Buy, having surpassed Amazon.com. But Blackfriars believes that Apple has three major product and pricing changes planned for the iTunes store, only one of which has been announced. These changes include:
- Music without copy restrictions. On May 30, Apple announced iTunes Plus music that doesn’t contain digital rights management (DRM) restrictions. iTunes Plus songs sell for $1.29 each in the US and are digitized at 256 kilobits per second, which is twice the data rate of normal iTunes songs. We expect iTunes Plus to raise the average selling price of iTunes music to $1.10 a song as a result.
- iPhone activations. One of the secret features of the Apple iPhone is that consumers will be able to buy iPhones from the online or retail Apple Stores and activate them entirely through their iTunes accounts. While this doesn’t create any obvious new revenue stream for the iTunes Store, it does extend the iTunes Store with new functions that may generate revenue at a future date.
- Movies for rent. The Wall Street Journal revealed on June 11 that Apple is negotiating with movie studios for the right to rent movies to consumers for $2.99 for a fixed number of days. Other sources have suggested that this price would be for a 30-day rental. Given that iPod video, Apple TV, and iPhone customers would all be targets for such content, we believe those consumers would rent more than 40 million movies in the first year of operation. We also believe that once Apple will offer high-definition movies as well, although we don’t have suggested pricing for such an offer.
Figure 3-1 below shows our projections of cumulative iTunes Store sales through the end of Apple’s fiscal year 2008. We now see Apple selling more than 500 million songs, 10 million TV shows, and one million movies each quarter this year, with those rates accelerating in FY2008. We expect movie rentals to be launched as part of a special event in September 2007, and for them to eclipse TV shows in units delivered.
[Figure 3-1: Movies rented at the iTunes Store will approach the number of TV shows sold by the end of FY08. Click the image to enlarge]
When we look at the revenue side of iTunes, Blackfriars believes that iTunes continues to be one of the most unrecognized revenue streams within Apple. As shown in Figure 3-2 below, we believe that movie rentals will quickly become the second largest revenue source for the iTunes Store by the end of next year, driven largely by the $2.99 rental price. And while we expect movie rental profit margins to be low, we believe that they will drive hardware purchases of iPhones, Apple TVs, and iPods, thereby supporting future profits.
[Figure 3-2: Movies rentals will also become the second largest source of iTunes revenue next year. Click the image to enlarge]
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