Weekly Update

Music’s new mixtape business model

Nielsen SoundScan last week provided some new data to explain why Apple was so anxious to acquire Beats Music. According to the 2014 Mid-Year Music Industry Report, sales (i.e. downloads) of digital music tracks in the U.S. were down 13 percent in the first half of this year compared to the same period last year. Sales of digital albums were down 11.6 percent over the same period, to 53.8 million.

On-demand streams, meanwhile, which Apple has not offered up to now, were up a whopping 42 percent.

While Apple’s iTunes Music Store remains the largest music retailer, that perch has gotten decidedly less lofty as paid downloads have begun to go the way of CDs, which were down 19.6 percent during the first half of the year (vinyl album sales were actually up more than 40 percent, albeit from a low base, reflecting the growing clout of audiophiles and hipsters).

Without a strong presence in streaming Apple’s clout within the digital music business — a business it once all-but owned — is a depreciating asset.

As I discussed in an earlier post, however, Apple’s interest in Beats Music wasn’t simply a matter of market presence (which remains limited at this point anyway). A significant part of Beats’ appeal had to do with its innovative approach to curation.

Beats uses a combination of machine learning, user input and expert human curators to create unique, contextually relevant playlists for its users, blending elements of on-demand and traditional radio. It’s like personalized mixtapes for the masses.

That aspect of the Beats acquisition was obviously not lost on Google, which last week finalized a deal to acquire Songza, a three-year old start up with a re reported 5.5 million regular users. Like Beats Music, Songza is all about the playlist.

Rather than generating playlists based on artist, song or genre, Songza’s “concierge” service creates playlists based on a user’s mood, setting, activity, time of day and other contextual factors.

Microsoft, meanwhile, whose Xbox Music service has been something of an also-ran, last week opened up third-party APIs for the service to developers and launched an affiliate program. The program and APIs will allow developers to draw on Xbox Music’s 38 million song library and metadata to create new music apps and services, including, presumably, new approaches to curation.

Together, the moves point to an industry starting to come full circle. Fifteen years ago, Napster began the unbundling of the traditional album format, paving the way for iTunes. The iTunes model is now giving way to unbundled music as a service.

Whether sold track by track or offered as a service, however, unbundled music has never generated the level of revenue or profit produced when music was only sold in bundles, either for musicians or distributors. With Beats Music and Songza, Apple and Google are betting that offering customized bundles as a service might finally be the right mix.