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Apple Has No Idea How Streaming Music Works

PORTLAND, Ore. (TheStreet) -- Apple (AAPL - Get Report) is watching its iTunes Radio streaming service flounder because it doesn't understand the most fundamental truth about streaming music customers.

We're not listening to streaming music services so we can find the next song to buy. We're listening and subscribing to them so we don't have to buy songs anymore.

That is what nobody in the industry wants to talk about. Regardless of whether Pandora (P - Get Report) manages to keep pace with competitors like Beats Music and Spotify, the streaming music subscription model is out there and isn't going away anytime soon. Oh, and it's making the a la carte, $1.25-a-song download model look foolish by comparison.

As Billboard noted earlier this week, only 1% to 2% of iTunes Radio listeners have hit the "buy" button to download the song they've been listening to since the service launched in September. At the same time, the number of music downloads has declined by more than 15%.

That's a big problem when Apple's iTunes controls almost 90% of the U.S. music download market, but is the third-largest pure music streaming service after Pandora and iHeartRadio, according to Edison Research. That means that last year's slight downtick in digital album sales, the first of its kind, and 8% drop in digital track sales recorded by Nielsen Soundscan fell squarely on Apple's shoulders. Meanwhile, the 32% jump in music streams (not including Pandora) went to AOL (AOL), Cricket, Medianet, Rdio, Rhapsody, Slacker, Spotify, YouTube (owned by Google (GOOG)), Vevo (a joint venture in which Google has an stake), Zune and a whole lot of platforms not named iTunes.

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Though iTunes sales grew 25% its 2013 fiscal year to $16.1 billion, making up 9.4% of Apple's overall revenue, iTunes' music sales have cratered, according to estimates from mobile industry research group Asymco. It hasn't gotten any better in 2014, as Nielsen notes digital track sales dropped 12.5% in the first quarter from 2013 and digital album sales dove 14.2% over the same span. That's roughly the rate at which music lovers have been abandoning the compact disc each year since 2007.

This isn't a Pandora issue or a digital radio issue: It's a straight subscription streaming issue. Interactive streaming like that offered by Spotify, Deezer and Beats Music increased volume to 34.28 billion streams in the first quarter of the year from 25.44 billion streams during the same period in 2013. With music executives putting 1,500 streams at the equivalent of a full digital album, streaming equivalent albums have increased by 10.1 million units so far this year as download sales dropped by roughly 9 million units, according to Nielsen.

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