Shining up the annual Apple revenues

Predictions are that the celebrity and billionaire-riddled annual Apple Worldwide Developers Conference will be enthralled by the company that gave the world the iPod. The perennial question is: what will be new now? One answer appears to be that Apple is taking on Spotify in music-streaming. The tech-masters at Apple have generally fallen behind in music, though its downloads outperform those of its competitors. It wants to nudge users into the wider world of Apple apps – the devices that make it first in the IT field, notwithstanding the reigning lore that a new Apple alternative doesn’t put independent competitors out of business. Peter Wilhelm

Joshua Brustein

Apple(Bloomberg) — Apple is expected to show off its new streaming-music service later today at its annual Worldwide Developers Conference. The stitched-together Spotify rival will combine disparate parts of Apple’s music operation: the mega-successful iTunes download store; the less-successful Pandora-style Internet radio service launched in 2013; and the streaming subscription service built by Beats Electronics, the headphone maker bought for $3-billion last year.

Apple is late to the subscription-music game — and building a successful streaming service is essential if the company that gave the world the iPod wants to remain relevant in digital music. Apple needs to make a splash in streaming — and the reason it won’t be easy is the slow and steady death of the download

Apple has utterly dominated the download market since creating it about 15 years ago. But listening habits are changing, with streaming music rising as downloads drop. Most of the activity is in ad-supported streams such as YouTube and the free version of Spotify, although most revenue growth comes from paid subscription services.

Being good at music helped save Apple, says Tom Silverman, founder and chief executive of Tommy Boy Entertainment, a record label based in New York. But Apple hasn’t kept up: “Up until now, until this world of streaming, they were all that mattered,” says Silverman. “As they thought they were in the phone business and other business, I guess they kind of lost track of the music business.”

Apple isn’t facing disaster if it can’t replace the revenue it makes from music downloads. The company makes nearly as much money every day as the entire digital music industry makes in a month, and Apple’s revenues are actually growing at a faster clip. So conquering the Spotifys and Pandoras of the world won’t benefit Apple in a significant way financially. But that doesn’t mean selling music isn’t important.

Even a money-losing business in music would be worth it to Apple if such a service sells more iPhones and keeps people from being tempted by competitor products. Apple has been offering a wider array of services to tie people more closely to the devices it relies on for the real money.  “While it is easy to dismiss the impact of music streaming on Apple’s financial model, we believe there is a bigger theme in play with the company slow-adding revenue streams on top of its hardware dominance,” wrote Gene Munster, an analyst with Piper Jaffray, in a note to investors last week.

Record labels want Spotify to thrive – so victory isn’t inevitable for Apple. Spotify is proving to be a formidable competitor. The entry of rivals hasn’t stopped Spotify from getting further ahead, as music fans have consistently chosen the service over Rdio, Deezer, Beats, and Tidal.

Despite the alienation of Taylor Swift and other loud disagreements over its payments to labels and musicians, Spotify also has a lot of support within the music industry. Among those benefiting from its rising valuations are the record labels that negotiated equity stakes in the company’s early days. The labels all have a vested interest in encouraging the continued existence of competitors to Apple, especially after seeing how little control they had when a single company controlled the entire market for music downloads. According to a December report by Manhattan Venture Partners, the overall equity stake held by the traditional music industry is just over 17 percent.

Apple’s recent track record on music has plenty of blemishes and missteps. Ping, a social network for music, was a failure. Pandora has continued to grow even after Apple introduced the very similar iTunes Radio. The mere existence of an Apple alternative doesn’t mean the death of independent competitors. “They have a lot of lost time to make up for. Will they get it right straight away? Probably not,” says Mark Mulligan of MIDiA Research. “But they will get there. This is now a major priority for Apple.” The company has the iTunes advantage

Apple reported 800-million iTunes subscribers last year, and the company hasn’t been shy about using its reach to encourage those customers to try new music. Apple CEO Tim Cook, with great fanfare, proudly announced the automatic distribution of the latest U2 album to all users’ phones — gift that not everyone appreciated — and now it seems likely that the company will push a free trial subscription for its new streaming service.

The question is how many people will decide to pay up for subscriptions? Apple’s service is expected to cost $10 a month or $120 a year — that’s on par with Spotify’s paid tier but far more than the average iTunes user spends on downloads. Given that Apple’s new product will be most attractive to the heaviest music consumers, a subscription service could actually convince the biggest iTunes spenders to cut back.

Some observers within the digital music industry have suggested that a global population of 100-million paid subscribers is the threshold at which subscription services will become sustainable. There are currently 41-million people paying for music subscriptions worldwide, according to the IFPI, an industry trade group. Apple could add the remaining 59-million by convincing just one of every 13 iTunes users to subscribe to its service.

 

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