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Apple is behind on streaming, but it has a secret weapon

Molly Wood Jun 5, 2015

Apple is behind on streaming, but it has a secret weapon

Molly Wood Jun 5, 2015

How many times can one company reshape the way we consume music? That’s the question Apple is facing Monday, when it’s expected to announce two new music streaming options in an attempt to make up the ground it’s lost to the likes of Spotify and Pandora.

Apple didn’t invent digital downloads, but arguably, it perfected them. The iTunes store is still a force, but it’s starting to slip, with sales dropping double digits last year. The streaming market is small, but crowded and growing.

Let’s take a look at what we know so far about Apple’s potential entrance into streaming:

What’s an Apple streaming service look like?

Apple has made one modest attempt at streaming already with iTunes Radio. The Pandora competitor has been quietly expanding, but it’s so far failed to make much of a splash. Apple is expected to relaunch the service with more distinct channels and big names attached like the BBC’s Zane Lowe, Trent Reznor, Drake and Pharrell Williams. That’s important for securing Apple’s hold on streaming radio overseas.

“The problem with Pandora — because of rights issues and how [little] money they have — is they operate in very limited markets,” says music industry analyst Bob Lefsetz. “So one would anticipate by virtue of launching in all these other markets [with] their brand name, Apple will make huge inroads and probably win in streaming radio.”

But likely more lucrative is a subscription-based on-demand streaming service from Apple. Reports in the New York Times and Wall Street Journal say it’ll cost around $10 per month for unlimited streaming, similar to what’s available from Spotify, Tidal, and Beats Music, which Apple acquired last year.

It’s not clear how long Beats Music will be around after Monday. The sale gave Apple a chance to look under the hood of an active, albeit small, streaming service and put a lot of expertise on Apple’s payroll, says music technology analyst Mark Mulligan.

“Beats built a service, from the ground up, around curation and programming and editorial, which is a very different thing from what Spotify did,” he says.

So what happens to the iTunes store?

Apple will essentially offer three different ways to deliver digital music: radio, on-demand streaming and downloads. The best-case scenario for Apple is that each arm will appeal to a different kind of consumer: if you like Spotify, Pandora, or your old iPod Nano, Apple will have an option for you. 

“I really think there are different customers for these different kinds of experiences, and it makes complete sense to me that Apple would want to be in all three spaces,” says Serona Elton, Associate Professor and chair of Music Media & Industry at the University of Miami

“If I subscription service does its job well enough, you never have any reason to buy music again,” say analyst Mulligan – and he thinks that shift would be acceptable to Apple. “The labels are much more concerned about Apple eating its own lunch than Apple is.”

Record labels are nervous because streaming changes the economics of how we consume music, Mulligan says. The revenue is more incremental, at fractions of a cent per play, instead of $10 up front for an entire album. Unlimited streaming also means people listen with more breadth and less depth — one might enjoy a wide variety of artists but spend far less time with each. That could hurt revenue in the long run, as could free, ad-supported streaming.

Digital music revenues in the U.S.

Why doesn’t Apple have an free on-demand option?

Apple is expected to offer some kind of free preview of its streaming service before shuttling customers to either a paid subscription service or radio. It’s also reportedly urging record labels to make Spotify to drop its free tier, and attracted the attention of the FTC in the process.

About three-fourths of Spotify’s 60 million users don’t pay, using on-demand streaming on desktop with occasional ads. That “freemium” model is great for acquiring users and it keeps Spotify competitive, but it isn’t a big moneymaker. One analysis found a play on Spotify Premium generated .68 cents in royalties on average, while free plays averaged just .14 cents.

Lefsetz says the big elephant in the room is YouTube, which has become the go-to when you want to to hear to a song without paying. Eventually users may pay $10 per month for convenient, on-demand mobile streaming, he says, but not yet.

“Eventually it’s going to work out, but the rights-holders are trying to close the door on free too soon, which will cause piracy,” Lefsetz says. “If Apple went with a free tier it would have a chance, but the way it is now it’s not looking good.”

So how will Apple pull this off?

As we saw with last year’s U2 debacle, about half a billion people use iTunes, and Apple can get stuff to them very quickly. The company already has data and credit card information for those users, which would make an Apple streaming service convenient and easy to adopt. 

“People who already consider themselves ‘Apple people’ based on all of the devices they use [may] try it out and find it appealing enough to be worth the cost, even though they could find the same content elsewhere,” Elton says. “It’s not just about the content, it’s about the experience.”

Apple’s other crucial advantage is that its not really a music company. It’s a tech company with a music arm. They can afford to sell and stream music at a loss, because ultimately they’re trying to sell devices. That’s not true of any competitors.

“Apple can afford to throw endless amounts of money at this and not worry about whether its going to cover its costs. Spotify can’t do that,” Mulligan says. “Spotify is doing that, but on a limited time scale.”


Service Free option? Compatibility on Android: Music Quality Play songs on demand? Share playlists with friends? Offline listening option? What makes it special?
Tidal No Yes Higher quality: 320 Kbps or above Yes Yes Yes Higher royalties to music creators, audiophile friendly
Spotify Yes Yes Higher quality: 320 Kbps or above Yes (paid) Yes Yes Easily build and share playlists with friends
Songza Yes Yes Lower quality: 192 Kbps or below No No No Extensive number of curated playlists by mood, genre, or activity
Rhapsody No Yes Lower quality: 192 Kbps or below Yes Yes Yes Large music library
Rdio Yes Yes Lower quality: 192 Kbps or below Yes (paid) Yes Yes Exclusive music selection
Pandora Yes Yes Lower quality: 192 Kbps or below No No No Music discovery based off finely-tuned robot algorithms
Beats Music No Yes Lower quality: 192 Kbps or below Yes Yes Yes Really, really cool headphones
Apple Music (rumored details) Yes No Lower quality: 192 Kbps or below Yes (paid) Yes Yes Apple.

Raghu Manavalan/Marketplace

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