by: Glenn Peoples

SFHH - 4-8-13(400)How people are spending money at iTunes is informative for a music business that wants to expand digital services deeper into markets and into countries around the world.

Apple announced earlier this week it has 575 million iTunes accounts, up from about 100 million iTunes accounts in September 2009. Analyst Horace Dediu matched account growth to revenue growth and found  a sharp decline in iTunes revenue per account over the last four years. “Each of the current 575 million accounts generates about half the revenue of the 100 million accounts of 2009,” he explains. From an average of roughly $74, on an annual basis, of September 2009, average revenue per iTunes account has fallen to around $40.

There are a couple factors at play here: geographic expansion and market penetration. Apple has expanded iTunes well beyond large, wealthy countries. (iTunes became available in Russia, Turkey and India in December and Latin American the prior December.) It only makes sense that average spending per account will decline as a result. At the same time, Apple is expanding beyond high-spending, early adopters in countries like the United States. Devices have become less expensive and more mainstream. Again, it only makes sense that later adopters will spend less than early adopters.
 
As Dediu explains, this decline is not surprising. A 50% decline should be expected from a six-fold increase in accounts because later adopters will pay less than earlier adopters. Dediu notes that Apple’s enterprise value (market capitalization plus debt less cash on hand) per iTunes account used to be about $1,200 but has fallen to about $300. In other words, investors use to value Apple assuming each customer (using iTunes accounts as a proxy for Apple customers) was good for many purchases of computers and iPhones. After Apple has added hundreds of millions of customers, the company is valued as if average customer spending dropped by 75%.
 
There is a parallel with the diffusion of digital music around the world. Average revenue per user (ARPU) will decline as stores and services expand. Early digital consumers spent more than people who adopted stores and services later. Countries that got stores and services earliest (the United States, Western and Northern Europe) will have a higher ARPU than countries that received them later. There are many countries with large populations — India, China, Indonesia — that will have lower ARPUs than, say, the United States, the United Kingdom and Sweden.
 
Declines in ARPU suggest prices will need to be flexible in order to accommodate later adopters. (Prices that worked for high-value customers won’t necessarily work for low-value ones.) The good thing here is music services can be priced for local markets. Companies like Apple that sell physical goods have a more difficult time pricing to local markets because it presents arbitrage opportunities (a person can buy an item in one country and sell it for more in another country).
 
Creating pricing tiers within a specific market is more difficult but not impossible. Although everybody pays roughly the same price for a track download, iTunes makes different digital albums available (regular, deluxe) that help separate the fans from the superfans. Some Internet radio services have paid ad-free tiers to separate the higher-value listeners from the lower-value ones. YouTube now offers paid channels with additional content not available to free viewers. Music subscription services will similarly need to find ways to attract both high- and low-value users with the same product.

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