ITunes Europe: Apple's Next Digital Music Play?

While Apple declined to confirm any European iTMS moves, the region is clearly important to the company. According to its SEC filings for fiscal second quarter 2004, Europe accounted for US$449 million of Apple's net sales, a 33 percent increase over the same period in 2003. The filing also reports increased demand in all of its products, except for the iMac.

Wall Street Takes Notice

Piper Jaffray senior research analyst Gene Munster raised the estimates and target for Apple in a research note released Tuesday. In the note, Munster draws a parallel between the iPod and Sony's (NYSE: SNE) early market success with the Walkman, first released in 1979.

"We believe that the similarities between the early markets for Walkman and iPod are significant," Munster wrote. "Walkman was introduced in 1979, and unit growth was consistently above 40 percent for the first eight years of its existence (and continued at above 20 percent for 6 more years). IPod unit growth was 146 percent in 2003 and, we expect, 261 percent in 2004."

Apple's European Challenge

According to Tim Bajarin, senior analyst with Creative Strategies, Apple can leverage the success of the iPod and iTMS in the United States in its pursuit of international markets.

"Apple has done an incredible job in the U.S. with the iPod and digital music," Bajarin told MacNewsWorld. "The faster they can add new markets, [the faster] they will extend their leadership."

According to Bajarin, Apple needs to focus on understanding the European marketplace and building a system capable of handling the sophisticated transactions of a multicountry region.

"The way people buy and enjoy music is totally different in Europe than in the [United States]," Bajarin observed. "The trick will be handling the transactions on the back end of the system."

In an interview with MacNewsWorld, Rui Carmo, an analyst with a major GSM operator in Europe and a self-described Mac aficionado, believes digital music across European borders is in its infancy.

"The only European market where there are painless electronic payment methods on a pan-European scale at this point is, essentially, mobile phone content," Carmo said. "This is because, although banking and regulatory issues are converging, it's still a bit of a hassle for someone in Portugal, say, to download a music single from a UK-based music store and pay for it electronically."

Carmo agreed with Bajarin that the culture of enjoying music is different in Europe.

"There is no European-wide equivalent of the RIAA," Carmo noted. "Downloading 'free' music is a commonplace activity in most universities -- but, interestingly enough, here people go out and buy the CDs afterwards."

He believes this is due to MP3 players -- especially iPod-sized ones -- not being as commonplace in the region. According to him, Apple needs to establish more of a retail presence. Currently, Apple's presence is limited to major European capitals.

ITunes Opportunities

All obstacles aside, opportunity abounds for Apple in Europe according to Bajarin, and Apple's style and usability can win over consumers.

"From a style standpoint, if there is any company that can do it with style and cache, it is Apple," he said, seeing Apple's immense focus on industrial design as a key to winning.

For his part, Hennes Teichmann, a musician with the German band beigeGT, told MacNewsWorld that he sees iTMS as a great venue for European musicians to distribute their music.

"It gives bands and record labels a method to go direct to the Internet -- no need to print CDs," he said.

Teichmann's band, which is on the Germany-based label Lado Records, has a video running on MTV Europe and believes digital music will further reduce the expenses of getting a wider audience of listeners.

Supply and Demand

As previously reported by MacNewsWorld, one of Apple's biggest challenges with its digital music deployment has revolved around supply and demand.

Recent shortages have led to delays in shipping the iPod Mini; however, Toshiba announced this week at Computex 2004, a technology conference being held in Tapei, Taiwan that it is releasing a new 1.8-inch, 60-GB hard drive to be supplied to Apple.

This, in conjunction with Hitachi's (NYSE: HIT) moves to increase production of its one-inch Microdrives for the iPod Mini, might help Apple satisfy the substantial demand from consumers.

In any event, Klaus Maeck, managing director of Freibank Music Publishing, a provider of copyright collection and administration services for musicians and other artists in Europe, already distributes songs through iTMS.

"The iPod may not be popular enough yet [in Europe], but Apple did the first step to change the music industry -- and they will create further demand," Maeck told MacNewsWorld.