8 Comments

Summary:

Any subscription music service from Apple could fundamentally alter the entertainment business. But it may come only when iTunes’ current gas runs out, and we’re not quite there yet.

Apple did not announce a subscription iTunes access model – which has been mooted by the Wall Street Journal and New York Times – along with iPhones and iPods on Wednesday.

And that’s just fine. Such a move, when it happens, will redefine the industry forever – but Apple, and music, can afford to wait.

Pay TV-like subscription access to unlimited content is the hot new consumer furrow being ploughed by the likes of Netflix, Spotify, Rhapsody and more. Ethan Kaplan, a Warner Music Group technology SVP until 2011, says:

“When Apple goes subscription streaming, it won’t be a surprise. Apple has had a subscription product ready for a while.”

Before it goes live, however, two things will likely need to happen:

  1. Streaming rivals must prove that there is a meaningful enough business opportunity in subscription to draw Apple out.
  2. iTunes Store’s track download business must plateau or begin shrinking, pushing it to discover new pastures.

We’re not there yet

Right now, subscription services may be gaining traction, but there were only 13.4 million music subscribers in the world last year (source: IFPI), and a crossover with downloads is some way off. It is as yet far from certain that everyone will want to move from ownership to access.

Growth in digital music sales may have slowed since Apple’s download store brought the business in to the 21st century in 2003, but U.S. digital music revenue still rose a worthwhile nine percent through last year (source: IFPI).

Selling an estimated 70 percent of digital music, which itself is now the largest revenue slice, iTunes store is far from “doomed”, as one blog post put it. In fact, the industry’s IFPI umbrella says Apple’s service is still “growing healthily”. Simply killing iTunes Store in its current form would do significant damage not just to iTunes but to the entire music business.

For these reasons, Apple is unlikely to slaughter the downloads cash cow on which it and the music business depend. Spotify is the canary in the subscription mine shift – Apple can wait for the bird to surface before it commits to a trek of its own.

As Kaplan says: “Their hand will be forced when this pain is less than the pain of ignoring it. Meaning when the ARPU possible from a subscription product eclipses their ARPU from a la carte download revenue.”

Why wait?

All that being said, much of iTunes Store’s growth is now coming from previously untapped emerging-markets seams, not domestically. And Apple should not necessarily leave it so long that rivals really do challenge its downloads before pushing ahead itself. In Sweden, where Spotify is popular, streaming already supplies the lion’s share of music revenue (source: IFPI Sweden). Worldwide, where adoption is less so, Gartner forecasts music subscription revenue will rocket to an impressive half of downloads revenue by 2015.

Apple can be the master of its own destiny, launching a streaming service alongside its conventional iTunes store – not instead of – thereby controlling the extent of its own cannibalisation. It has already sowed the seeds with iTunes Match and iCloud, and it has built significant server farm capacity to deliver such a service.

Music analyst Mark Mulligan says the industry needs exactly such a big direction change, because downloads – really just a digital equivalent of retailing analogue units – have not brought significant enough new sales to a business once ravaged by P2P.

Slowly to the edge

But most people outside of streaming services themselves hope for evolution, not revolution. “If Apple experiments and gets it wrong, then the music industry will hurt more than Apple will,” Mulligan says.

When labels finally overcame their reticence to the streaming model in 2010 and 2011, they realised that exponents like Rdio, Deezer and Spotify present an opportunity to ween themselves off their iTunes downloads dependence. Apple entering the subscription market would not only shake up the music industry’s biggest money pot, it could also put it back at square one, reliant on Cupertino.

So it is fortunate that any subscription play by Apple would likely require new licenses be earned – and the labels would likely drive a hard bargain, requiring massive upfront payments for finally making their entire catalogues available for the cost of an album.

Spotify has only got as far as it has because major labels hold a rumoured 18 percent of its equity in exchange for them having written off these advance payments. That is largely favouritism – Apple would need to do real business with the labels; and, this time, it is missing Steve Jobs, who charmed label bosses back in the early noughties for iTunes’ current iteration.

Even easier, in licensing terms, would be Apple launching a personalised “radio” service, comprising non-interactive streams, rather than a fully on-demand service. This would have a far less profound impact.

Bigger pie, smaller pieces

Artists, who are, of course, the lifeblood of music, may be wary of Apple flipping models. They have come to know and love royalties from per-track purchases, roughly equivalent to plastic equivalents – but some complain that rates from streamed plays are too low.

Existing services like Spotify argue that ephemeral streams can in no way be equated with downloadable tracks, which consumers buy once and play again and again. With increased usage, they say, artists will see more and more returns.

Although some may fear Apple launching the same model against whose rates they already lament, a streaming iTunes could yet take the subscription streaming model to significant enough new heights that artists start seeing streaming income at significant scale.

Overnight hit

An iTunes streaming subscription would popularise the still-nascent model overnight.

“Their impact on the market will be catastrophic,” Kaplan says. “Consumers will love it.  For competitors though, Apple would have more paid subscribers within hours of announcement than they’ve ever seen in their entire existence.”

iTunes already has a billing relationship with 435 million customers. That is more than four times the threshold Mulligan has previously forecast subscription needs to achieve to become viable. The result will be an earthquake that will change the economic base of the music business. If everything goes according to plan, that means lower individual royalty rates, accrued at higher scale.

But no-one is sure how much scale needs to be built to make up for the lower income. “For the labels, the short term gains in terms of (payments) will be great,” Kaplan says. “Long-term, though, it tosses traditional artist mechanical revenues off the cliff.”

Go-to-market

This is high-wire stuff. Apple will need to get it right – and not just for the music industry’s sake. Some of its latest music innovations have not fared well – iTunes Ping was poorly adopted and killed on Wednesday, its iOS Podcasts app has been derided, leaving Apple simply to iterate on the same old product it introduced nearly a decade ago.

Fortunately for it, iTunes’ existing adoption means Apple will not need to work as hard as its streaming challengers to introduce a new service.

On the road to subscription custom, some services stream free, ad-supported music to the majority of users. Its a classic conversion tactic, and one to which Apple is entirely unaccustomed. An ad-supported streaming iTunes would require a significant advertising sales operation like that built out by Pandora and Spotify. Instead, Apple’s core competency is in getting people to pay up for content right away.

This may be good for the music industry. Broadly, the freemium services are currently thought to pay two tiers of royalties – a lower rate, from songs listened to by free, ad-supported users; and a higher rate, accrued from plays by paid-up subscribers. It is the former around which most consternation lays – an Apple commitment to the latter could go some way to promising dreamed-of returns.

Tim Cook/Dave Grohl photo is used with thanks, courtesy of Tim Bradshaw.

  1. Apple never reinvented music. That’s just silly.

    Share
  2. I have had a music subscription for several years now with my Zune Pass on my Zune (which I actually still use because of Zune Pass) and on my Xbox 360, Media Center, laptop, etc. So what exactly would Apple be re-inventing?

    Share
  3. Ever hear of Xbox music. I can stream unlimited music to my phone, desktop, laptop and Xbox for 9 dollars per month.

    Share
  4. Thoughtful article but it lacks insight. The future is beyond mere “streaming”–which is a passive reclined experience. The future clearly resides with participation. That is, the fourth wall between performers and listeners is destroyed. The listener becomes an active participant in the music experience. No longer will people passively have sonic creations spoon fed into their ears… They will begin to customize, personalize and participate in creating new versions of their favorite tracks by adding their own percussive elements, vocals in a karaoke-style environment, and mashing various isolated elements of existing tracks onto the latest remixed version. I strongly suggest you consider Danger Mouse’s Grey Album as one primitive example. Also Flaming Lips Zaireeka and various multi-channel sound installations provide an exciting, full-licensed and thus revenue-generating stream for Artists and labels in future. 125hz.com

    Share
    1. I absolutely agree with you, that one’s music life will become less passive (I think the P2P experiment will ultimately show that it was less about free music than about evaluating before buying, for instance) though hard to imagine massive production participation (maybe, though). I’ll wager that listening communities will form more organically, where not every listener needs to listen to a hundred songs to find the several that were worthy of the time spent. Then what will really change is artists creating less volume, focusing on innovation (one song could generate enough income as opposed producing 10 albums that labels relentlessly flog, wasting our time and money) and this, finally, will be the big revoution

      Share
  5. Call me old fashioned. I prefer to own.

    Share
  6. And still your physical copies of music may actually be worth something. Digital zilch. The music insist is laughing all the way to the bank and suckas fall for it.at least the indies still try and do it right

    Share
  7. Mesut Darendeli Sunday, September 16, 2012

    Apple re-invested the distribution of music. Not the music itself. That’s the most stupid thing you guys are keep saying.

    Share

Comments have been disabled for this post