Will Google Kill iTunes?

Apple (Nasdaq: AAPL  ) had better watch out. The mighty iTunes juggernaut is about to face off against a new competitor called Google Music.

Google (Nasdaq: GOOG  )  is not the first big company to challenge Apple's dominance of the music market, where iTunes now dispenses about 25% of all music sold, including CDs, 8-tracks, and wax cylinders. Amazon.com (Nasdaq: AMZN  ) is doing OK with its Amazon MP3 store, but it's an uphill battle against a ruthless competitor with a stranglehold on the market.

Big G is pretty comfortable with fighting Apple from the underdog position, and has a unique set of weapons at its disposal. Android phones are set to eclipse iPhones in quarterly sales as we speak, and in total installed base as early as next year. That's a testament to Google's capacity to disrupt an established market with new products. Lessons learned from the Android campaign will apply neatly to this Google vs. Apple music challenge, too.

What's going on?
Google is not looking to just copy iTunes and hope for the best. Instead, it looks like Google Music will be a cloud-based service based on technology from freshly acquired Simplify Media. If you never used Simplify Media, you can think of it as a way to listen to your own library of digital music tracks from anywhere. All you need is a Web browser with Flash from Adobe Systems (Nasdaq: ADBE  ) installed. (iPhone users have their own, special-purpose application to handle the lack of Flash.)

Simplify is dormant at the moment, not accepting new users or handing out software downloads. The whole service should come back to life under the Google banner later this year, according to CNET sources. Google showed a Web-based music service to guests at last month's I/O Conference and promised an Android version of it for the Gingerbread/2.3 version of that platform.

If Google sticks to the twice-a-year release schedule we've seen in Android's early days, that means we're looking at something like a November release of the Android app. General availability for other platforms should not be far behind.

What's at stake?
The symbiotic iPod/iTunes ecosystem contributed a staggering $12 billion of sales to Apple in 2009. iPods are still outselling iPhones, but only by the slimmest of margins; Apple is shifting its customers from single-purpose media players to all-purpose smartphones with astonishing efficiency.

Of that $12 billion market (or $19 billion if you count iPhones as music players), a new music store that doesn't sell hardware is aiming for only $4 billion of the net sales. In a pure thought experiment, let's assume that Google equals Apple's music sales right now. The extra $4 billion of annual run-rate would represent a 16% boost to Google's top line, while diversifying the company's operations quite severely from the current addiction to online ad sales.

Big G is reaching into other non-AdWords revenue sources as well, including TV advertising and paid information services, but these efforts have yet to pay serious dividends. Getting Google Music up to speed quickly would serve nicely to show the market -- analysts and all -- that there really is more to Google than endless floods of banner and text ads. If distrust of an ad-only revenue model is keeping the stock price down, then we're talking about a watershed moment in Google's history.

What's next?
Google Music could take off quicker than you might imagine. Warner Music Group (NYSE: WMG  ) , Sony (NYSE: SNE  ) , and the other music industry bigwigs would love to see somebody challenging Apple's monolithic stature in the music market. They already have a working relationship with Google thanks to the way YouTube keeps music videos front and center. Oh, and unlike Amazon, Google has an Android army of music-playing gadgets at its disposal. Try using a Kindle to play MP3s, dude.

Nobody else can match a user-friendly music service in the clouds to an appropriate marketing channel the way Google can. Music fans who use the leading search service (that would be Google) to find out more about their favorite bands, albums, or songs now get pointed to mostly noncommercial resources like Pandora, Rhapsody, and News Corp. (NYSE: NWS  ) property iLike; Amazon MP3 and iTunes are nowhere to be found. Imagine funneling the purchasing power of that demographic right into Google Music, and you're starting to see why I think this is a very big deal.

Google Music won't kill iTunes outright; there are too many diehard Cupertino loyalists to ever achieve that. But check back in a year or two, and iTunes might finally have the serious rival that Amazon MP3 never quite was.

Please take our Motley Poll and then scroll down to the comments section to elaborate on your vote.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. Google is a Motley Fool Rule Breakers recommendation. Apple, Adobe Systems, and Amazon.com are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2010, at 2:38 PM, Tim1T wrote:

    Talk about a reach. Our writer talks about Apple in absolutist terms: "stranglehold on the market" and "Apple's monolithic stature." Please. Apple has 25% of the music market.

    Google does have some cards to play given the power of the Android OS. But they also have plenty of weaknesses that our zealous writer has overlooked.

    First, Google may own the Android OS but they are only one player when it comes to actual Android phones and the phone networks they are on. And the Android partners may have their own ideas when it comes to who profits from any music revenue.

    Second, we have absolutely no indication that Google can come up with a music site that is as easy to use as the Apple iPod/iPhone/iTunes environment. Quite the opposite.

    Google has all kinds of cloud products that are fairly pathetic. I use the Google Gmail service but it's had a half-baked interface for years. So who's to say Google will do any better with a complex iTunes style service?

    Instead of talking about Apple's "monolithic stranglehold" on the music biz, our writer should realize that people went to iTunes for one reason, because it made buying music a better experience. If Google can come up with something that is demonstrably more useful, folks will use it. But Google will have to do a better job on its cloud apps that is has so far.

  • Report this Comment On June 16, 2010, at 3:21 PM, ajhhall wrote:

    And a cloud-based service is only as good as the access to the Internet. So you're out of luck on most trains, planes, rural areas, when or travelling overseas.

  • Report this Comment On June 16, 2010, at 3:39 PM, marv08 wrote:

    I have to second what Tim1T wrote...

    Amazon did have exclusive access to DRM-free tracks for almost a year, thousands of single tracks are cheaper on Amazon than on iTunes, and still... they get nowhere. And compared to the idiotic GUIs Google comes up with (ugly, unintuitive, confusing), even Amazon's rather bland Web store is attractive. Google does not know nothing about GUI design and even with decade-long betas they improve nothing in the end.

    Whatever they do, they are already too late. By September Apple will hold the annual iPod event and launch their own cloud service (from the ashes of Lala)... Google will then launch something beta and ugly in November. DOA.

    I do not know about you, but I have never in my life searched for music on Google - no idea where you see an advantage here.

    And again: Apple is neither monolithic (music from iTunes plays on every device and you can play music from any source in iTunes) nor is there any kind of "stranglehold"... they have a mere 25% market share (far less internationally), the vast majority of sales is still physical and they do not exercise any pressure on the competition, just the opposite - they are more expensive in most cases. People choose iTunes because it is well done, beautiful and convenient (and they have good service) - of all competitors Google is the last to be decorated with any of these adjectives...

  • Report this Comment On June 16, 2010, at 3:54 PM, lordmorgul wrote:

    RE Sony/Warner, etc... "They already have a working relationship with Google thanks to the way YouTube keeps music videos front and center."

    Are you paying any attention to the broader media market? You seem pretty clearly to not be paying any attention.

    In the last year both Sony AND Warner have filed thousands of DMCA takedown notices against YouTube forcing them to REMOVE music videos so that they are NOT getting exposure without paying the big media for them.

    This does not describe a 'working relationship', it describes big media completely out of sync with advancing technology and emerging markets. Google will have to fight these giants every step of the way in exactly the same way that Apple has had to fight them. There is no 'working' here, the whole industry is broken.

  • Report this Comment On June 16, 2010, at 4:18 PM, bluesguy84 wrote:

    A small player in this market is called Emusic. I use their service a lot. They have more blues, gospel & roots music than Apple does.

  • Report this Comment On June 16, 2010, at 4:35 PM, XMFTom7 wrote:

    "iPhone users have their own, special-purpose application to handle the lack of Flash."

    Isn't Flash itself a special-purpose application, a plug-in, in the absence of any video standard? ;)

  • Report this Comment On June 16, 2010, at 10:30 PM, Melci wrote:

    Apple has 25% of the entire music market which includes bricks and mortar stores, but it has 70% of the digital music market while Amazon has only managed to grab 11.6% so Google will have a hard time catching Apple.

    Also, Android is much further from overtaking Apple than you indicate.

    You shouldn't rely on those numbers from NPD which suggest that Android sales in the USA have over-taken the iPhone. NPD only covers the consumer market and considering that 40% of AT&T's iPhone sales are to businesses, right there NPD's figures go out the window. (Android's business share is much less due to lack of hardware encryption, exchange support, remote wipe etc).

    In terms of installed base, Nielsen reports that the iPhone outnumbered Android by three to one (28% vs 9%) in the USA during q1 2010 with both growing their share by 2% QoQ. And these numbers don't include the other members of the iOS platform - the iPod touch or the rip roaring iPad which together double the size of the iOS platform. Remember it's not just about the phone anymore - it's the platform.

    In Australia where every carrier has the iPhone and offer a whole range of competitive plans, the iPhone has captured 40% of the smartphone market and is only 5% behind first place Symbian according to IDC in q1 2010 and closing fast. Of course since iPod Touches almost double Apple's marketshare (not to mention the just released iPad), iOS is already by far and away the largest mobile OS on this continent. In contrast Android has only captured a measly 2.1 percent.

    In Japan, the iPhone has captured an astounding 72% of the smartphone market after pundits predicted it would fail due to not having emoji and other Japanese-specific curios.

    Remember, the iPhone is still outselling Android 2 to 1 worldwide despite many users holding off for the release of iPhone 4.

    Likewise Gartner indicates that worldwide, Android's 8 point increase was at the expense of Symbian (down 4 points), RIM (down 1 point), Microsoft (down 4 points) not Apple, who were up 5 points from a much larger base.

    In point of fact, according to Gartner's figures, Apple sold 3.1 million more iPhones in Q1 2010 (40% more phones) than the total number of phones from all Android OEMs.

    There are 100 million iOS devices out there today vs less than 10 million Android devices and worldwide Gartner indicates that 8.4 million iPhones were sold last quarter vs 5.2 million phones from all Android manufacturers combined, so the gap is still growing wider by the day.

    -Mart

  • Report this Comment On June 16, 2010, at 10:44 PM, greenwave3 wrote:

    Don't discount the author's point that a Google is still selling a whole boatload of Android phones, across multiple manufacturer-partners' platforms. Google is a powerful adversary and if they are intent on competing with Apple for every nickel and dime in the digital realm, I wouldn't bet against them.

  • Report this Comment On June 17, 2010, at 1:15 AM, Melci wrote:

    @greenwave3

    The thing is Apple has been here before time and time again - All the massed forces of media players and online stores from all the big names, Sony, Dell, HP, Microsoft, Toshiba, Creative, Archos, Rhapsody, Napster and all the Music Cartels all lined up under the Plays For Sure architecture and look how that turned out.

    The iPod sells over 250 million devices and captures 70-80% of the market and the iTunes Media store with 70% of the market worldwide and every audio system, car and even aircraft with built-in or optional iPod docks.

    Yes, I'm sure you'll say it is different this time, but in fact it is more loaded in Apple's favour than before. Back then even with the music industry giving the likes of Amazon DRM-free music and cheaper prices, Apple's ecosystem still trampled the opposition.

    Now Apple is the one with most of the aces up it's sleeve:

    - 100 million iOS devices all capable of playing music from the iTunes Store (and movies, TV shows, audio books, podcasts and iTunes U content etc)

    - 150 million credit card enabled accounts belonging to users willing and able to buy enormous amounts of media (10 billion songs sold, 100's of millions of videos, TV shows and movies sold) with just a single click

    - A vast App marketshare dominance (3 billion apps downloaded, 225,000 apps in the store)

    - Dozens of other Music services running on all iOS devices such as Pandora, Spotify, Rhapsody and stacks of video apps and stores like the ABC app, BeyondTV, Netflix, UStream etc.

    - Apple bought Lala so who knows what new features they will release soon based on that.

    No, I think you'd be foolish to assume Google is just going to walk in and kill iTunes. I'm sure they will probably prove to be a decent competitor and maybe give Amazon a run for it's money, but they are far from a shoe-in.

    -Mart

  • Report this Comment On June 17, 2010, at 11:33 AM, gman5556 wrote:

    Take that Apple for getting into mobile advertising. Is Google going to be a huge threat here? No. But lets say they take a small chunk of market share. That can take quite a dent out of Apple's $12 billion.

    ITunes/Apple products easier to use that Google products? I don't know how you can get simpler than a plan white page with some text. Apple lovers are getting a lot shakier and defensive these days whenever Google is mentioned in the news.....And they should be worried. What will happen when Steve Jobs is out? Competitive advantage can not be very strong if you really on the brilliance of one man. Google is a system, Apple is one man's genius. Besides Apple operates in a far more competitive market, and lets face it, one day someone else will come up with the new "coolest" and "sleekest" device, be it 5 years from now or 10 years, eventually it WILL happen.

    Like I said earlier, Google Music will not kill Itunes. It will take a dent out of Apple's margins however. A much, much bigger dent than Apple gave Google with IAd.

  • Report this Comment On June 17, 2010, at 2:51 PM, Oldfool103 wrote:

    As long as I can burn my own copies of my purchases and keep them on my laptop/iPad/iPod for mobile listening without having to pay anyone for access, I'm cool with as many providers as possible. Just don't think that I am going to pay a phone company for the privilege of listening to the music I have already paid for.

  • Report this Comment On June 18, 2010, at 12:56 AM, astormovich wrote:

    Just Google-only controls traffic, and now trying to move traffic from the musical "shop-network-computer" in the "shop-network." I also think that using the second choice would be expensive, however, do not forget that for music to buy a hard drive, and have their own storage is much cheaper than the annual fee for account storage for 10 years. Other hand, Google trying to reduce our storage costs and increase your traffic, but in many countries, ISPs are in no hurry to reduce the cost of access. Their model could work if access to the Internet will be free, or almost free.

    Google went on the market, just because he knows everything about us, and we continue to help him through the use of search, mail, advertising, and Youtube.

    But giving all in one hand, we will lose the competition, and this is very very not good.

Add your comment.

DocumentId: 1210200, ~/Articles/ArticleHandler.aspx, 4/24/2014 12:53:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement