iTunes Is Obsolete

"More Americans buy music online, fewer buy CDs," was the AFP headline that caught my eye. In related news: Sugar is sweet, the tax deadline is coming, and you should use sunscreen. Film at 11, presented by Captain Obvious.

The real news
All kidding aside, it pays to keep an eye on exactly how quickly music consumers are moving into cyberspace. Don't you wish you had known how Apple (Nasdaq: AAPL  ) would dominate digital music when iTunes was new and unproven? If you had bought a few shares on a gut feeling when iTunes was introduced, you'd be sitting on nearly 12 times the investment today.

The good news this time is that there's another revolution underway that may render iTunes obsolete in a few years. According to the NPD Group's 2008 Digital Music Study, streaming is starting to replace downloads.

Downloading vs. streaming
The difference, for the uninitiated, is that download stores like iTunes and Amazon's (Nasdaq: AMZN  ) MP3 store have you pay for single tracks or whole albums, and then you download your digital bounty. Transfer to an iPod, your cell phone, or perhaps a Microsoft (Nasdaq: MSFT  ) Zune, and you're good to go. Easy enough.

But streaming takes that convenience to a whole new level. Set up a play list or pick an online radio station, fire up your favorite way to access that service (including cell phone applications, set-top boxes like that trusty TiVo (Nasdaq: TIVO  ) , or simple web sites), and kick back with a cold beverage. It's legal, supremely accessible, and you have your pick of streaming services. It's kind of like the Netflix (Nasdaq: NFLX  ) online video feeds, only without the moving pictures.

Privately held Pandora helps you find new music based on what you already like. Yahoo! (Nasdaq: YHOO  ) Music contracts out its streams to RealNetworks (Nasdaq: RNWK  ) and its Rhapsody service. Some services ask you to fill up your portable player with content before you can start listening, whereas others -- like Pandora -- stream directly to your iPhone or BlackBerry through the 3G airwaves.

The investing takeaway
NPD says that 18% of Internet users know about Pandora today, compared to 9% last year. 19% of American consumers get music from social networks like MySpace or Facebook, a 27% increase year-over-year. If Pandora ever goes public, I'd be first in line to buy shares. Today, RealNetworks is your best bet for investing in the streaming music revolution. I'd be happy with just a fraction of Apple's success, but this trend might make iTunes altogether obsolete.

Watch your back, Apple: The streamers are coming. Adapt or die.

More musical Foolery:

Microsoft is a Motley Fool Inside Value recommendation. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund is a longtime Netflix shareholder and customer, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (20) | Recommend This Article (14)

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 March 19, 2009, at 2:09 PM, Jonlaz wrote:

    Lame article. Reads like a promo for streaming. iTunes and Amazon have nothing to fear. You leave out a couple keys issues with streaming. No.1, you don't own your music and can't take it with you if you decide to stop paying the monthly fees for access. No. 2, you don't own your music and can't transfer it, copy it, create CD's with it or anything else. Streaming has its place, but collectors of music will not be swayed.

  • Report this Comment On March 19, 2009, at 2:09 PM, hsurfer wrote:

    This sounds like the old argument about renting versus buying digital music. This one's been settled already: people want to own their music because, unlike a movie, they want to listen to music over and over.

  • Report this Comment On March 19, 2009, at 2:09 PM, FoolInFL wrote:

    So...you want me to pay for the same song over and over and over. Is that what you are saying? I, personally, would rather pay once and listen many times, thank you.

  • Report this Comment On March 19, 2009, at 2:34 PM, xinudog wrote:

    Umm.. who is losing all the money NOW due to iTunes, Amazon, etc.. The music labels.

    They have fought tooth and nail to try and keep CD/DVD sales going despite the onslaught. Not to mention all the heat they take from consumers on the topic.

    So now you expect us all to believe the music labels are going to embrace streaming?? How are they going to get rich on rentals??

    Mr. Byland, you need to stop writing fiction based articles. Please plug in, and think before you write such non-sense.

  • Report this Comment On March 19, 2009, at 2:50 PM, JPDemers wrote:

    Who the heck sits in front of their computer to listen to music? People use their iPods in the car, on the bus, on the subway, at the mall ... on the go, in other words. (That's what the iPod is FOR, doh!) I live in NY City, and 3G service comes and goes from block to block, vanishes underground, and is hit-or-miss in big or tall buildings. A 20-second burst of email on the CrackBerry works just fine, but you can't stream music that way. And in the 'burbs? Fuhggedaboudit.

    I don't know about you, but I'm not about to sign up for a deal that cuts back drastically on where I can listen to my music, and I can't imagine who would want to. Who is the customer base? People who can't afford 99-cent tunes? Doesn't sound like a promising place to peddle a subscription service.

    I see **NO** viable market for streaming music. Truly a lame idea.

  • Report this Comment On March 19, 2009, at 3:07 PM, mak5252 wrote:

    The labels aren't losing money because of iTunes, Amazon etc., if they are losing money, and that is debatable, it is due to sharing of non-DRM music.

    Streaming is highly supported by the labels because they get royalties for every song played. Since streaming encourages experimentation more tracks get played and more royalties are paid. That's how they get rich on rentals.

    As to the general streaming vs. owning argument, it is clear that both sides have merit. Owning was clearly the dominant paradigm, but others are discovering that old CDs or even .mp3's that just sit around don't have much value either. Sure you might listen to them again someday, but how often?

    The ever increasing ubiquitousness of data connections make the possibility of one listening to whatever song one wants wherever one might be very real. And while this will never match the visceral thrill of throwing a treasured piece of vinyl on a quality turntable and settling down in your ideally positioned chair to listen to your favorite song, as it turns out that thrill is not that important to a lot of people.

    MAK

  • Report this Comment On March 19, 2009, at 3:17 PM, jon654321 wrote:

    Nice title to attract hits - but dumb article.

    Pandora's % growth can be attributed almost entirely to iPhone usage. Read interviews by founders. Apple has already adapted. They promote Pandora.

    People will always want to own music for when they are not connected or for specific - on-demand desires.

    Streaming is just one part of the panoply of options. And, by the way, iTunes has streaming internet radio - did you not know that?

  • Report this Comment On March 19, 2009, at 3:53 PM, keithmoondune wrote:

    Pandora might be ok if you are in the USA, not so if your ISP is outside of USA. I can use iTunes anywhere.

  • Report this Comment On March 19, 2009, at 3:56 PM, SkepticalOx wrote:

    Actually, this article makes quite a good point, except that the time for streaming may not be here yet.

    Number one, it doesn't have to be limited to your PC. If you could stream to music-playing cellphones, it'll become that much more useful. Now if your car was internet connected, your stereo system at home is connected, etc. etc... and with the few exceptions (like, uh, going camping where you get no wireless signal), the potential is there.

    All that is needed is the infrastructure to be there, and it's not there yet (just check out how expensive the cell networks still are).

    And buying music is expensive, especially at iTunes 99 cent a pop, especially if you are the type to listen to a variety of music, new and old. Just build it peeps, and I'll be on board... cause there's a bunch of music I don't listen to that I bought... and that's inefficient.

  • Report this Comment On March 19, 2009, at 4:06 PM, Piznit wrote:

    Why would I want to pay for streaming to listen to a radio station that I have no control over what they are playing? Even if its free, which some are now, I don't listen to them "on the go" because they don't reliably play songs I want to hear. The entire concept of downloading music to your iPod/Zune/etc is so you can hear what you want, WHEN you want, how many ever times you want. If I want to hear the latest song 50 times in a row, I hit rewind on my iPod. You can't do that with streaming a radio station. Not to mention some of them play commercials...

  • Report this Comment On March 19, 2009, at 5:55 PM, secretservice wrote:

    Kind of a lame article, but the comments are well focused. I am in the live entertainment business and we all thought casino's would put us concert promoters out of business and it never happened-they get the chessy 60's and 70's acts.

    I would say similar scenario here - while I do have a Pandora account, I still have an itunes account and my own itunes library as I want to be THE one that controls my content. Streaming doesn't allow you to control your content, just genre and realistically, there is not going to be a mass migration to Pandora from itunes.

    Sure, Pandora is cool when i am sitting at work and need some background music, but out walking or flying from MSP to PHX I have my iphone playing my library and not much is going to change that,

  • Report this Comment On March 19, 2009, at 10:03 PM, dpetrosky wrote:

    The problem is the Fool assumes that streaming is FREE and that Owned content is not everywhere. You will pay ether with dollars or ads for streamed content and streaming is not always available. Purchased content can be used anywhere. In planes, on subways or at the top of some mountain that may never see network coverage. As storage systems continue to increase you can ether carry it all with you or leave it in the cloud and only pull what you want to have.

    Consumers have voted with their wallets. If it costs money they want to own it not rent it. Now if prices change dramatically, maybe peoples attitudes will change too but with the norm right now being $10-$15/month to rent or $.99 each to buy. Most people seem to want to buy.

  • Report this Comment On March 19, 2009, at 10:15 PM, yetanothersteve wrote:

    Adapt or die Apple!

    Ummm... Apple is the MASTER of adapt or die.

    The big elephant on their radar screen was that cell phones were getting more powerful. Analysts and their "ipod killer du jour" notwithstanding, cell phones were the only credible threat to their 70% share in music players.

    I think they're adapting reasonably well.

    I think streaming will have its place. If so, I think a lot of the devices being streamed to will be sold by Apple.

    What remains to be seen is if any real money will be made in streaming. Apple, conversely, seems to have the make money thing down pretty well.

  • Report this Comment On March 19, 2009, at 11:52 PM, juliehowe wrote:

    I would respectfully disagree with the author of this article. Streaming of music on the go requires a reliable high-speed internet connection. My G1 from T-Mobile would fit the profile - except for a few glaring problems.

    If I streamed live music from the Internet, my G1 battery would go dead in 45 minutes.

    None of the smart phones currently on the market have decent sound quality (except maybe for the IPHONE). They were never meant to be used as MP3 players and the music listening experience on these devices is dismal, at best.

  • Report this Comment On March 20, 2009, at 1:04 AM, Guitarpack wrote:

    I listen to Pandora all the time....I'm listening to it now. But I can't figure out how it makes money. Anyone know?

  • Report this Comment On March 20, 2009, at 2:29 AM, hoipoloi wrote:

    Advertising. What is streaming but glorified FM radio? I can't begin to count how many songs I recorded from radio through the years, now I just record them from Pandora, and put up with all the banner ads on the side panels. Better quality and no irritating DJ or traffic reports. I'd have to say I'm bullish on streaming.

  • Report this Comment On March 20, 2009, at 12:20 PM, Pbomb wrote:

    I would not line up to buy that IPO. Like others who have commented, I would never choose renting my music over owning. Might have some following but I do not believe it is a large threat to itunes. Besides didn't Napster have a similar service that allowed you to pay a monthly fee and access all their cataloged songs? Seems like in addition to the ownership issue the extent of the content is an issue - does Pandora have the same amount of content accessible?

  • Report this Comment On March 20, 2009, at 12:32 PM, klambert72 wrote:

    >> Who the heck sits in front of their computer to listen to music?

    I think the theory is that in another 5-10 years, we will all be connected 24-7 through mobile devices. Which isn't such a stretch IMO.

  • Report this Comment On March 20, 2009, at 4:24 PM, ELCOH wrote:

    I'm a rhapsody user, a musician and music lover and I find the service to be excellent. For $12 a month I basically own almost any song I would ever want to hear. Four million songs beats the 4000 songs on my ipod! I have a Sonos music system in my home and I can wirelessly access the music in 3 seperate zones in my home. When I get to the office I can put on my computer and listen to the same set I left off at home, or search for new stuff. If the song is a must own I can just click on it to purchase but mostly thats not necessary. I have a wide range of interests in music and its all there whenever I need it. I have not yet purchased a Rhapsody on the go player because they still look early in their development but I understand some good ones are coming out later this year. A good portable player is really the key for making this service a step above itunes. Twelve dollars a month for 4 million songs is a much better deal than my cable TV bill of $80. I do think if they come out with a great player Ipod will be obsolete.

  • Report this Comment On March 23, 2009, at 4:09 PM, mildlyguitarded wrote:

    The lamest thing about streaming music is the quality. Pandora is cool but sounds worse than mp3s, which sound pretty bad even at their best. I use iTunes but am looking forward to a higher quality of compression - someday.

    I sincerely hope everything doesn't go to streaming - but the way the public rarely cares about quality of sound, I am afraid this article may be pretty much on target.

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