Apple Has No Idea How Streaming Music Works

PORTLAND, Ore. (TheStreet) -- Apple (AAPL) 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) 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.

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.

Simply put, music fans are swapping pay-as-you-go downloads for streaming subscriptions that let them listen to anything they want without having to pay each time they fall in love with a song. Bob Lefsetz over at The Big Picture did his best to grab Apple and the music industry at large by the collar and shake it into consciousness last year by noting that music's future isn't in sales -- unless you're really into vinyl -- but in streaming spins. Imagine Dragons didn't get to the Grammys on album sales and airplay and Calvin Harris didn't become one of the biggest DJs in the world by waiting for iTunes preorders. The metrics have changed, but so has the listening public.

If the recent slumping download numbers haven't made it clear, let us spell it out for you: It's been a long time since the older segments of the music marketplace got their first iPods. It's been more than a decade since iTunes started doling out downloads and just about as long since crafting playlists was something anyone but the most patient of party hosts or wedding planners took joy in doing. A device or iTunes library stocked with thousands of songs isn't a point of pride anymore: It's an onerous chore.

Our libraries of digital music are looking as neglected as big Case Logic binders full of CDs, with iTunes users listening to only 19% of their more than 5,000-song libraries as recently as 2011. Older music listeners don't want to play curator anymore and a younger generation that's grown up with streaming music never had to. That decline in downloads and continued slide in CD sales suggests they'll never have to.

"The a-la-carte consumption model is 11 years old and at this point the decline in the U.S. download sales seems unstoppable; it doesn't seem like the store is refreshable," said one record label about the once-indispensable iTunes.

And that's how Apple, of the dancing iPod silhouettes and indie-rock jingles, got caught sleeping after the aughts ended. The company that was once well ahead of the music industry suddenly became part of it and contracted its various illnesses: Hubris, adamance, greed. As great a force as Apple was in driving the last great music format change away from CDs and to lower-quality digital files, it now joins the labels in being dragged toward the subscription streaming future.

-- Written by Jason Notte in Portland, Ore.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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