While Apple's (NASDAQ:AAPL) celebrating a mostly stellar fiscal second quarter, there was one area of the company's business that Apple clearly needs to revamp (and no, it's not the iPad).
In its earnings report, Apple showed that its "Services" division -- made up of the iTunes Store, App Store, and Apple Pay -- increased revenue by 9% year over year to $5 billion. But its sales of books, music, movies, and TV shows in the iTunes Store actually declined by 4% for the third consecutive quarter, and 5% in the first six months of fiscal year 2015.
So why does that matter? Because the decline is proof of what most consumers already know: Tech users want to stream content and not buy it.
And it means Apple needs to adjust its digital content strategy.
Moving from stores to subscriptions
According to Nielsen SoundScan, streaming music surged 54% last year while digital album sales tumbled 9% and sales of individual songs fell 12%. According to The Wall Street Journal, digital music sales in iTunes were down even more -- nearly 14% -- worldwide in 2014.
And video rentals aren't fairing much better. Video-on-demand rentals across cable, satellite, and Internet fell 6.7% last year, which brought years of growth in the area to a halt. iTunes clearly falls into this category, and its TV show and movie sales were likely hurt as more U.S. consumers move to streaming subscriptions. Nielsen says 41% of U.S. homes now have a subscription-based video on-demand service, (like Netflix or Hulu) and 13% have more than one.
So if digital music and video sales are moving in the wrong direction, where does Apple go from here?
We all know where this is going
It's pretty clear what Apple has to do here: launch its own television and music subscription services. If you've been keeping up with Apple, then you know the company is already making plans to do both.
Last year Apple bought the music streaming service, Beats, for $3 billion and most everyone expected Apple to turn that into a new subscription service that would bring the music streaming fight straight to Spotify and Pandora. Of course, that hasn't happened yet, but rumors peg a relaunch of an Apple-branded Beats subscription for sometime this summer.
Apple is expected to charge about $8 per month for its service, and according to Re/code it won't have a free, ad-based, option. The idea behind a paid-only service is that users will get access to exclusive content earlier than other services, while artists and labels will benefit from users actually paying to listen to music.
As for video content, Apple has something in the works for that too. Apple's rumored 25-channel television service could debut as early as this summer, and others in the industry are confident Apple is already moving in that direction. On an earnings call earlier this week Time Warner CEO, Jeffrey Bewkes, said that he's confident Apple will launch a television streaming service and noted that, "It's no surprise to anyone that Apple would be interested in launching a TV product."
Apple recently struck a deal with HBO to be the exclusive over-the-top provider for the content creator's programming for three months, which shows Apple's willingness to branch out into new forms of video streaming services and ability to secure content deals.
Considering Apple's iTunes music and video content sales are slowing down -- and streaming subscriptions are on the rise -- it's the perfect time for the company to leave its old iTunes ways and fully embrace its subscription future.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple, Netflix, and Pandora Media. The Motley Fool owns shares of Apple, Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.