Conflicting Reports on iTunes Sales Declines

By Scott M. Fulton, III, BetaNews

December 13, 2006, 12:11 PM

A New York Times story published yesterday cited a report from Forrester Research analyst Josh Bernoff, which inferred that since the ratio of iTunes songs sold per iPod sold has been steadily rising, a disconnect could be occurring between the two products in a changing portable media market.

"The numbers suggest that iPods are not driving iTunes sales as much as early supporters may have expected," the Times' Alex Mindlin wrote.

As the headline was disseminated throughout the Internet before winding up on the front pages of newspapers and the topic of local TV news banter, the story became an interpretation not just of a tapering in iPod's and iTunes' growth, but a warning klaxon that sales in both categories are falling, plunging, even "collapsing."

But with analysts poring over the multitude of headlines this morning, and breaking out their newly installed copies of Excel 2007, their results are indicating the news is not so bad for Apple as the Times report indicated.

Yesterday, Seeking Alpha blogger and retail industry consultant Carl Howe reported that in examining some of the same data that Bernoff examined, and that the Times cited, the disconnect trend does not lead to bad news for iTunes. In fact, sales growth there could continue to be viewed as phenomenal. Howe produces his Excel growth chart, with the plot points clearly labeled, as proof.

"Anyone who claims iTunes sales are collapsing can't do basic math," Howe writes. "The rate of song purchases is going to change month-to-month, and Forrester's data shows that. But the iTunes Store is the fourth largest online retailer of any type and is selling almost three million songs a day. And of course, none of that counts revenues from TV shows or movies either, each of which amount to millions of dollars of revenue per year. If that's a collapse, I don't know what these authors consider success.

Meanwhile, journalists working to substantiate the original story, in a bout of after-the-fact fact checking, discovered an element of the Forrester report that the Times story missed: Apple's revenue from the sales of iTunes songs for the first six months of this year may actually have fallen, plunged, etc., during the first six months of 2006. The rate of that decline appears to be 17% per month, with the result being a 65% annual drop in revenue.

Perhaps if the Times had run with that one, they could have used the "Collapse" verb before the bloggers got to it.

An Apple spokesperson, however, disputed the notion that iTunes sales are declining in any form whatsoever, in a statement to the Chicago Tribune this morning. The spokesperson cited sales figures compiled by the RIAA, showing the continued rise of all music sales in the US, and asserting that iTunes accounts for at least 6% of that figure.

But later, even consultant Howe acknowledged that Forrester's data could be interpreted as a tapering off of sales, regardless of its cause. "As the data clearly shows, that is very, very far from iTunes sales collapsing," he wrote. "It simply means that its growth has slowed somewhat."

The Forrester conclusions were based on an examination of 2,791 randomly sampled iTunes credit card purchases made by US customers. (Add to the list of Unasked Questions the one about how Forrester obtained this data.) Even Bernoff himself questioned in his own report whether two years' worth of data were enough to substantiate findings of a six-month trend, saying, "With only two years of full data, it is too soon to tell if this decline was seasonal or if buyers were reaching their saturation level for digital music."

"There are so many questionable things in this New York Times article about the sales of iPods and iTunes," wrote Mary E. Tyler yesterday for her Infinite Loop blog on Ars Technica, "that I don't know whether to laugh, cry, or thump some Times-ling on the head and ship him back to Miss Minchin for basic arithmetic."

Among the overlooked facts that could play into Bernoff's statistics, Tyler cites, is the fact that not all iPods sold over the course of history are operational today. As a result, they should probably not have been counted among the cumulative total of iPods sold, with respect to the ratio of iTunes songs sold.

Securities analysts this morning are also questioning the report's findings, now that everyone knows what they really are. A Pacific Crest Securities analyst told Bloomberg that he sees digital music sales growth rate as steady, and reasserted his firm's rating for Apple as "outperform."

And Piper Jaffray analyst Gene Munster is quoted by Reuters as noting strong annual growth for iTunes specifically this year.

As Carl Howe added for his blog this morning, "Yeah, it's annoying that Forrester is predicting the collapse of iTunes from a carefully selected 7-month period coming down from the Christmas peak of last year. Anyone in retail knows that January through August aren't like September through December (let's see, do we buy more music at Christmas or in the summer? Let me think about that). But let's recognize that a lot of the heat about this is just people reacting to short term trends like day-traders instead of looking at the long-term business, year over year. And Apple's long-term iTunes business is pulling in revenue of about a billion dollars a year and fueling a juggernaut of iPod sales where it's making multiple billions. I'll take that type of problem any day of the week."