The big story of yesterday evening was a somewhat cryptic report by The Wall Street Journal that Apple wants to build its own streaming music service, a la Pandora. Once you step back from the “hey, wouldn’t that be cool”-edness of it all, it’s a weird report. But it may not be totally bonkers. In fact, it probably makes a lot of sense.
Streaming music services aren’t profitable yet…
Why is it a weird report? Well, a big part of it has to do with the fact that the music streaming business isn’t very profitable. For example, let’s look at the company Apple is reportedly trying to emulate, Pandora. They are the best established music streaming company out there, but they still have yet to turn a profit, citing the increasing licensing costs of streaming music.
Streaming music services, at best, aren’t very profitable. At worst, they are loss leaders.
It’s the same story everywhere. Spotify says they are not only not profitable, but profitability is not a priority and the matter of when they will be profitable is “irrelevant.” (What?) MOG recently sold itself to Dr. Dre’s Beats for a paltry $14 million, which is just depressing. I couldn’t find any data on Rdio, which doesn’t have a free service, but I’d be surprised if much was different.
So streaming music services, at best, aren’t very profitable. At worst, they are loss leaders. Apple doesn’t do anything unless they think they can turn it into a profitable, billion-dollar-a-year business. So what is Cupertino thinking?
Apple’s media empire is based, ultimately, upon downloads. That’s how Apple makes its media billions. Apple wants you to click a “Buy in iTunes” link so it can siphon off a thirty-cents-on-the-dollar cut. So why would Cupertino risk disrupting its downloads business in favor of setting up a loss-leading Pandora-clone? Why give people music for free when you’re already making billions of dollars getting people to pay for it? Isn’t there a serious danger that Apple would sabotage itself, trading a profitable downloads empire for an unprofitable streaming service?
How Apple could change everything…
Maybe not. Warner Music Group, one of the biggest players in the music industry, released its third quarter results last month. Their findings? While the likes of Pandora, Spotify and Rdio can’t make a profit, Warner’s now making 25% of all of its money off of streaming.
But here’s the interesting part. Despite the fact that an ever-increasing number of users are using a la carte streaming music services like Pandora and Spotify, digital sales through services like iTunes aren’t declining. In fact, for the first time ever, digital sales are now growing faster than the loss in physical sales.
For the first time ever, digital sales are now growing faster than the loss in physical sales.
The fact of the matter is that the popularity services like Spotify, Rdio, Pandora and MOG are leading people to buy more music online through iTunes. It makes sense: the more music you’re exposed to, the more likely you are to buy that music. Anecdotally, I can say that I have not only spent much more on music online since I got an Rdio account, I stopped pirating music all together.
Apple is surely aware of this. That means that if Apple launched a Pandora-like service, it might be worth it for Apple if the uptick in digital downloads is greater than the money lost in streaming licensing feeds But Apple’s not the kind of company that likes loss-leaders even if they are benefiting the company as a whole. So how could Apple make a streaming music service profitable?
How Apple can succeed where Pandora has failed…
The answer is that Apple has secret weapons in its arsenal that Pandora, Spotify, Rdio and more don’t have that give it a major leg up over the competition.
For one, if Apple created a Pandora-like service, they could instantly put it on hundreds of millions of devices. Every iPhone, iPad, iPod touch and Mac sold would instantly get it, either through an operating system update or as an iTunes update. That means Apple won’t have to fight for market share: it would become the world’s biggest streaming music service overnight.
Apple won’t have to fight for market share: it would become the world’s biggest streaming music service overnight.
Apple also has troves of data from millions of existing iTunes users about what kind of music they like, what their favorite songs, artists and genres are, how much money they spend on digital music every month, etc. That’s not just data Apple can sell to record companies, it’s data they can leverage to improve recommendations and make sure, from the very second you first launch Apple’s Pandora-like, that their users are hearing songs that they not only like, but are likely to purchase.
A streaming music service also solves a small problem for Apple. When people buy a new iPhone, iPad, iPod or Mac, they have to put music on it: it doesn’t come with anything. If Apple starts shipping devices with a streaming music service on it, they can not only market the hell out of that fact to sell more devices and rake in money promoting artists and albums over the service, but they can lubricate the entry of neophytes into purchasing digital downloads through iTunes.
The future of streaming…
So imagine this. Next year, you buy an iPhone 5S, and it comes with an updated Music app that has a new “Radio” tab. This launches Apple’s new Pandora-clone service, which plays music playlists generated by Genius using your past iTunes history, if available. If you like what you’re hearing, buying the song through iTunes is just a click away. And even if you don’t buy songs using the service, Apple can make money by selling promotional slots to the music industry and displaying iAds on hundreds of millions of devices (this last point is important to note, since Apple has been struggling to turn iAd into a major, billion-dollar business in its own right: a streaming music service shipped on all devices with iAd at the core could go a long way towards increasing iAd’s relevancy in the company.)
Of course, even the Wall Street Journal only said that Apple was “mulling over” a streaming music service. We’ve been down this road before. When everyone was whispering about Apple’s rumored iTunes in the Cloud initiative, which turned out to be iTunes Match, there were a lot of talk about the service being a Spotify or Pandora-rival. Instead, it was Apple’s ingenious method of monetizing existing MP3s already in users’ iTunes libraries, whether previously purchased from Apple, downloaded illegally or purchased DRM-free from other services.
So Apple may very well have other plans that are being lost in transmission here. However, I would take this rumor seriously. A year ago, I would have probably said that Apple launching a streaming music service made absolutely no sense, because it would jeopardize Apple’s downloads business. This year, with data showing that digital downloads are bigger business than ever thanks to streaming music services, I think it may very well be the future.