The invitation to Apple’s event on Wednesday at the Yerba Buena centre in San Francisco shows an acoustic guitar, with a soundhole in the shape of the Apple logo. Seasoned watchers of the company know that this is the time of year when the iPod gets a refresh, yet there’s a shadow over the digital music player that turned Apple from an also-ran computer company into a force in the technology world.

The latest sales figures for the quarter to June showed 9m sold - the lowest quarterly number since 2006. In short, the iPod, launched in October 2001, looks to be in terminal decline. While Apple is unworried - sales of its iPhone and iPad are booming - the drooping figures for the digital music player market are a concern for another sector: the music companies.

Riding on the iPod

The music industry had looked to the iPod to drive people to buy music in download form, whether from Apple’s iTunes music store, eMusic, Napster or from newer competitors such as Amazon. The problem for them is that digital music sales are only growing as fast as those of Apple’s devices “At a time where we’re asking if digital is a replacement for the CD, as the CD was for vinyl, we should be starting to see a hockey-stick growth in download sales,” said Mark Mulligan, an analyst at Forrester Research who specialises in music and digital media. “Instead, we’re seeing a curve resembling that of a niche technology.”

At the International Federation of the Phonographic Industry (IFPI), which represents the worldwide music industry, a spokesman agrees that the growth of digital sales has slowed. Figures for 2009 released earlier this year show that while CD sales fell by 12.7%, losing $1.6bn (GBP1bn) in value, digital downloads only grew by 9.2%, gaining less than $400m in value. “The digital download market is still growing,” said Alex Jacob, a spokesman for the organisation. But the expectations that, in time, digital sales would replace CDs and make up something like the same value have been dashed.

But as iPod sales slow, digital music sales, which have been yoked to the device, are likely to slow too. The iPod has been the key driver: the IFPI’s figures show no appreciable digital download sales until 2004, the year Apple launched its iTunes music store internationally (it launched it in the U.S. in April 2003). Since then, international digital music sales have climbed steadily, exactly in line with the total sales of iPods and iPhones.

No elbow room for the music industry

Yet it hasn’t been a pleasant ride for the music industry. Steve Jobs negotiated a deal which meant that every track was sold for 99 cents. Initially, record labels thought that was unimportant; Apple was still a bit player, the iPod a tiny seller. But at the end of 2004, the iPod suddenly turned into a juggernaut driving Apple’s profits, and the iTunes store became the key source of digital revenue, leaving the record labels with a contract they disliked: they would have preferred “flexible pricing”, where they could charge different amounts for new and old songs and albums.

But there was no alternative outlet with which to threaten Apple, which gained an effective monopoly over the digital music player market, achieving a share of more than 70%. Some tried. There were rumours in July 2007 that Universal, one of the biggest labels, was threatening not to renew its iTunes contract, but nothing came of it. In the hope of breaking Apple’s stranglehold over the download market some labels provided Amazon with MP3 downloads that would play in any player before offering them to Apple. It failed. Though Apple did cede control over pricing to the labels in January 2009 (in return for getting MP3 downloads), Apple is now the largest single retailer of music in the U.S. by volume, with a 25% share.

Now, though, Apple has much more profitable fish to fry, in the form of TV shows and films, apps and ebook sales to its iPhone and iPad (and the iPod Touch, effectively an iPhone without the phone function). It gets 30% of the sale price on apps and ebooks, roughly the same as it does on music download sales, but those sales are expanding exponentially, while music downloads are not. In June Steve Jobs said there had been 5bn app downloads in just two years (and Apple earned about $410m from its 30% cut of sales). That compares with 10bn songs downloaded from the iTunes music store in seven years.

The app wave

At the British Phonographic Industry (BPI), which represents the major U.K. record labels, spokesman Adam Liversage says an important difference, not yet reflected in sales figures, is the rise of services such as Spotify and we7, which offer “streaming” services, either funded by advertising or direct subscription. According to the IFPI, revenues from such “performance” outlets made up about $800m of world revenues in 2009, and has been rising by about $100m annually since 2004. If Apple - and every other mobile phone maker - are moving to an app-based economy, where you pay to download games or timetables, why shouldn’t recording artists do the same? It turns out they are. Those in the forefront include the British singer Peter Gabriel, whose Full Moon Club app is updated every month with a new song. The Canadian rock band Rush has an app, and the industrial rock band Nine Inch Nails, led by Trent Reznor - who has been critical of the music industry for bureaucracy and inertia - released the band’s first app in April 2009.

Even so, the IFPI and BPI think the app model shows promise - as much as anything because it might be an effective way to reduce online piracy, still the bugbear of the industry. In 2008 the IFPI estimated that 95% of downloads were illegitimate, and while it doesn’t think that it can ever be entirely cut off, nor that every download is a “lost” sale, any move to a format that makes piracy harder is welcome.

It may be premature to predict the death of the iPod just yet too - but it’s unlikely that even Steve Jobs will be able to produce anything that will revive it. And that means that little more than five years after the music industry thought it had found a saviour in the little device, it is having to look around again for a new stepping stone to growth - if, that is, one exists.

Copyright: Guardian News & Media 2010