With the WWDC just a week away, rumors are swirling about the possibility of an Apple Music launch.
You probably remember Apple’s AAPL 2014 acquisition of Beats Music, on which it spent $3 billion to jumpstart its music streaming service. Beats makes high-end headphones with some special features (Bluetooth, noise cancelling, curated playlists, cloud-based libraries, etc) and this was the main attraction (it was also one of the few profitable streaming companies at the time).
Apple has been a trend-setter in the music industry with its iTunes and iPod, spurred by the trend toward buying digital music that doesn’t spoil like a record or CD might. But the trend is changing yet again, and paying for tracks that you then own forever is going out of fashion. The next-gen trend is sharing things so you make little to no upfront payment. In the music industry, this is called streaming, or a service that entitles you to listen to music either free (ad-supported) or for a subscription fee.
Why Is Apple So Important?
Although late to the party, Apple’s dominant position in music sales and loyal customer base make it somebody that music labels want to listen to.
At the same time, the latest trend has put them into a bit of a quandary. On the positive side, streaming might just be the answer to piracy, which is very easy in the digital world. On the negative side, it is a less profitable business.
Thus we come to the next point of contention: is the free or subscription-based system better? There is no clear answer to this because consumer preferences vary. The free model ropes in more users while subscriptions add certainty to revenues.
Apple customers are used to paying for things, so it may not need the free tier. In fact some media reports suggest that Apple used its clout to induce music labels to disallow the free tier on competing services like Spotify. It also apparently offered Universal money to prevent its songs from getting on Google’s GOOGL YouTube.
Apple is unlikely to pursue that line too far, first, because it hasn’t been successful in the past (its price-fixing agreements on book sales earned it a substantial fine) and second, because the FTC and European regulators are already investigating its practices in the music industry.
The Problem With The Streaming Business
Earlier, the consumer paid only for artists and producers when they bought music but now there is a new layer in distribution called the streaming companies. Naturally, consumers want to pay as little as possible for this additional layer so music costs don’t increase.
The success of a streaming company therefore depends on its ability to negotiate prices with producers and profitably transfer those to the consumer. How much profit it makes depends on the kind of differentiation it is able to offer, which is rather difficult given the nature of business.
Warner recently said that it’s streaming revenue surpassed download revenue in the last quarter for the first time in its history. Spotify, the market leader in music streaming sees that the free tier makes up the bulk of its user base while contributing less than 10% of revenue.
What Is Everyone Else Doing?
Apple will mainly be up against Spotify although there are a number of other players including Rdio, TuneIn Radio and BBC’s iPlayer Radio (for BBC road shows).
Spotify has been gearing up for Apple’s new service.
Earlier this month, it brought back the $1 subscription fee for three months of Premium. The idea is to get as many people on board as possible before Apple’s launch and then convince them to stick with it.
Just last week, it added as number of new attractive features including video streaming, artist road shows and a running program in collaboration with Nike among other things.
Apple Could Have All The Answers
Apple hasn’t said much about its service and no one really knows if it will even launch at WWDC. But our rumour pickings indicate several interesting possibilities.
First, Apple is unlikely to do away with iTunes Radio (free ad-supported) and iTunes Match (subscription-based) services. It is instead expected to enhance these services and take them to international markets like the U.K. and Germany. It’s also worth noting that emerging markets like China and India are expected to drive the next leg of Apple’s growth where Internet connections could affect user experience and budgets.
Second, Apple is most likely bringing a social element to its new streaming service, wherein artists but not users would have their own pages where they could post new titles or make announcements. Users would be able to comment on new songs on these pages thus influencing downloads. This is an extremely interesting feature, also providing Apple the real estate to advertise works from other artists and pick up a commission.
Third, Apple is trying to get exclusive rights to some titles to lure users. This is an expensive business and just three titles are available. If Apple can charge premium rates for these exclusives, it may be worthwhile.
Fourth, Apple has made some interesting new hires including four BBC producers. One of the producers has been instrumental to BBC Introducing, which features undiscovered talent. Talent scouting is a very good strategy because people need money when they are starting out in their careers and may be more open to exclusive contracts and shared ad revenue at that time.
Fifth, the new service will very likely have a free trial period, so users can try it to understand the level of integration with Apple products and gauge the user experience. This is probably the reason Spotify started its $1 promo.
Sixth, the Beats headphones could be revamped and sold alongside to provide a soft landing.
Finally…
There is a whole lot of talk out there about Apple’s inability to negotiate deals with labels and the service getting delayed as a result. And this could be partly correct. That’s because it’s hard to see Apple venturing out on a low-margin or loss-making business with no prospects of improvement. That wouldn’t be good for investors and that’s just not the way Apple operates.
Currently, Apple carries a Zacks Rank #3 (Hold). Some stocks that have been performing well include Lenovo Group Limited LNVGY, carrying a Zacks Rank #1 (Strong Buy), while PetMed Express, Inc. PETS carrying a Zacks Rank #2 (Buy).
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