Apple's huge market share for the iPod -- generally reckoned to hold 80% or more of the digital music player market -- should guarantee high sales at the iTunes Store, the only source for legal music downloads for iPod owners. However, Forrester concludes that isn't necessarily working out in practice as a business model.

"With half of all transactions costing $3 or less . . . transaction fees threaten to make iTunes unprofitable," analyst Josh Bernoff wrote. "Since the introduction of the iTunes Music Store, Apple has been steadily selling just 20 iTunes tracks for each iPod sold, suggesting that even at $0.99, most consumers still aren't sold on the value of digital music."

After examining transactions between April 2004 and June 2006, Forrester noted that after 18 months of strong growth, the number of transactions has been declining steadily since January this year. Digital music also represents a small proportion of music sales to online households overall, with CDs still holding a comfortable lead.

"The comparatively modest iTunes numbers suggest that consumers are still spending the bulk of their music budget $14-at-a-time on shiny discs," Bernoff wrote. "Only Apple knows just how much profit there is at the end of the day on a $1.98 credit card transaction for two songs, but with transaction costs, hosting costs, and the wholesale price of the songs, there's not much margin left."

Bernoff also rubbished the widespread online rumour that Microsoft would seek to boost the fortunes of its Zune digital music player by replacing songs purchased on iTunes with legal Zune-format equivalents at no cost. "Although this could help Microsoft to sell Zune players, it could be a financial disaster for the Zune Marketplace," he wrote. "Instead, Microsoft should concentrate on making the experience of porting unprotected music tracks -- clearly the bulk of what's on iPods -- to consumers' Zune players."
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