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Forrester’s latest report on iTunes sales is causing a stir. "iTunes sales ‘Collapsing’," says The Register. "Digital flatline looks ominous for music labels." Bloomberg and The Street.com have also picked up the story.

Josh Bernoff, the Forrester analyst who wrote the report, says that iTunes revenues did indeed fall 65 per cent over five months from a high in January this year . But he told me on the phone that was a sequential decline that "reflected seasonality" in iPod sales, rather than a sign of a collapsing market for iTunes.

For its part, Apple says that "the conclusion that iTunes sales are slowing is simply incorrect."

The real lesson of the Forrester report, says Mr Bernoff, is that the iPod and iTunes are no panacea for the music industry’s slumping sales. Here’s a link to an executive summary of the report. Read more on what iTunes customer buying habits mean for big record labels after the jump.

Forrester’s analysis showed that most iTunes customers are dabblers who buy only a handful of songs. While the number of iPods sold has grown steadily in recent months, the number of iTunes songs sold per iPod has remained relatively flat at 20-23 - an average of less than two CDs per iPod.

Most iPod owners appear content to rip their music from their existing collections, burn friends’ CDs, or download their music elsewhere, rather than load up their iPods with iTunes.

Mr Bernoff says that spells trouble for the music industry. "In 2000-2001, a lot of us assumed that, like a CD player, the iPod would become a tool for generating music sales," he told me over the phone. "All our projections for the music industry were based on that. But an iPod is not a machine that generates music sales. It produces 20 downloads and that’s not enough to make up for the declining sales the industry is suffering."

Music sales fell to $10.5bn in 2005 from $13bn in 1999. Apple currently sells about 1bn songs a year on its iTunes service, but 80 per cent of digital music sales come from just 1 per cent of online households, according to the Forrester report. As Mr Bernoff says, "That’s a very narrow base to try to build a business on."

Update: Nicholas Carr has an interesting take on the Forrester numbers here.

December 12th, 2006 in Uncategorised | Permalink