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Music Biz: Apple To Enter Online Music Streaming Arena with...

Posted by - 04:40 PM on 09/11/12
The Wall Street Journal reported recently that Apple is in talks to license music with the intention of creating an online music streaming platform that would be targeted to compete with Pandora. In fact, Pandora, which recently became a publicly traded company, has seen its shares fall a pretty significant amount over the past week as the rumor about Apple's involvement in the online radio market has spread.

Any rumor about Apple playing a new hand in the music industry has to be taken seriously, which explains the reflex reaction of Pandora's stock drop. Apple already has what amounts to the world's largest record store in the form of iTunes, which sells more music than any other place on the planet - whether it be physical or digital sales. Last year, the digital medium finally overtook physical formats in terms of percentage of total music sales. While that seems an obvious notion to most of us, it was actually a fairly close race between digital and physical sales in 2011. In total, digital music sales still accounted for only 50.3 percent of music sales last year. However, that number should be expected to continue rising as more and more people are ignoring their local FYE or Best Buy stores and using iTunes or Amazon MP3 as their main music-purchasing method.

With Apple's iTunes store being the top destination for digital sales, and with over 400 million iTunes accounts currently registered, Apple has a deep and undeniable stranglehold on a great chunk of the music-listening population. In consumer terms these days, it's all about convenience - and Apple offers more cross-platform convenience than any of its competitors. Loads of people own iPhones - those who don't own iPhones probably have iPods - and millions of people own MacBooks, iPads, Apple TVs, or what-have-you. The convenience of purchasing your music in one place and getting it automatically and effortlessly delivered to every device you listen to music on simultaneously is what puts Apple ahead of the game. And what else is Apple good at? Pleasing the customer.

That's probably what this rumored venture into Internet radio streaming is all about. The current "radio" tab in iTunes is, for lack of a nicer way to put it, boring and ignorable. But what if Apple created a Radio tab that was more like Pandora? Imagine the way your Genius playlists work in iTunes - you click a song, ask iTunes to make you a playlist, and it forms one out of some songs in your iTunes Library. Imagine an equally easy click-button to go ahead and give you a Pandora-like streaming radio station of some songs you might know...and some songs you've never heard. That's the advantage of Pandora, isn't it? It helps you discover new music that's similar to music you currently like, without having to do the research yourself. You'd never have to get online and go to Pandora.com - you could just do it all right there in your iTunes app, which you probably already have open anyway.

If Apple were to replicate the Pandora experience in its current iTunes app, there's no logical reason to believe that Pandora would have much life left in it. As Forbes reports, Pandora is already struggling greatly - not just in terms of its recent stock hit, but in the category of money-making in general. Unlike Apple, Pandora has yet to find a way to actually make any money off of its users. And it doesn't seem to have the firepower or adaptability to do so. Advertisements between songs? That's how Pandorda is making its money? As that Forbes article points out, who really goes ahead and clicks on the ads in their desktop or mobile browser anymore? Even if I just head a New Found Glory song and I get an ad telling me about a new What's Eating Gilbert EP release - obviously a very interconnected product - am I really even going to consider clicking on it? Probably not. I just want to listen to my next song.

Apple has always been good at figuring out how to squeeze money out of its users. With iTunes as the No. 1 purchase point for digital products, it obviously makes money that way...but Apple also figured out how to become the first and only company ever to make money off of our generation's nasty habit of illegally downloading music. For $25 a year, iTunes Match takes your entire library of music - whether you paid for it or not - and matches it with the music in the iTunes store, storing it in Apple's iCloud for you. What's the advantage? Having your entire library at your fingertips anywhere you have Internet, with whatever device your iTunes account is logged into, and therefore never needing to take up any space on your computer hard drive, mobile phone, tablet, or whatever device ever again. While iTunes Match seems to be taking a while to catch on, it will surely see increased use as people become more comfortable with the concept of cloud storage and as faster and faster 4G LTE networks make it easier and less of a hassle to stream everything on your phone instead of play it from your storage space.

Given Apple's money-making history, I would expect for its online custom radio service to incur you a fee. Apple was comfortable with charging us only $25 a year for iTunes Match - so you might expect an even cheaper price point in a custom radio service. Maybe it'll only be $10 a year. Maybe it'll be a one-time fee of $20. Regardless of what the price is, the point is that Apple will find a way to make money off of a Pandora-like radio service. And if Apple does give us this for free? Well, the company is happy making its customers happy and it's even happier improving its own product. No longer will you need the Pandora app to access a custom radio - you can do it from the same music app that you're used to clicking on to listen to your own songs.

With Pandora's major issue of having no subscription revenue from its extremely large user base, it will probably be a lot easier than most people think for Apple to swoop in and dominate the custom radio streaming market within a few years. Apple is an established beast in the music industry, whereas Pandora's legacy looks to go down as merely a part-time disruptor. Pandora has seen undeniable success in terms of a user base - it has twice as many users as Sirius XM and has infiltrated its way into car stereo systems, making it just as easy to listen to in your car as your local stations - but throughout all that expansion, it never figured out how to truly make a lot of cash. Remember when everybody used Napster? As short-lived as Napster was, it changed the music industry drastically. If Apple or another competitor makes a more convenient, more user-friendly product than Pandora, there's a good chance of Pandora going down as the radio industry's Napster. With the endless possible integrations into iOS, Apple looks to have the upper hand in terms of convenience and user-friendliness.

The next step for Apple would be to launch a service to compete against Spotify, Rdio, Grooveshark and the like. Since its launch, Spotify has become the most popular subscription-based streaming service in the world. The Spotify desktop app currently imports the songs on your hard drive into an iTunes-look-alike library, but also gives you unlimited access to its entire streaming library. This provides the valuable advantage of actually letting listeners listen to whatever they want, instead of just a radio station. Spotify has two price points: $5/month for desktop streaming access with no audio advertisements, and $10/month to add the functionality of streaming music on your mobile device. If Apple instituted a similar price model with a similar product, there's also a chance of it nullifying Spotify's current dominance in that market. In the name of convenience, iTunes could become a one-stop-shop...where you can listen to the music you own in your iTunes library, listen to all the music you don't own in the streaming service, and listen to customized radio stations to discover new music in a Pandora-esque radio tab.

What do you guys think? Will an Apple radio service begin the eventual end of Pandora's immense popularity? Let's not forget that Apple makes most of its money on selling hardware - with profits from its everything else merely providing a higher number on the company's bottom-line profits. Theoretically, Apple should be expected to expand its dominance in the music industry as far as it can, solely to keep iOS and iTunes users happy with new features.
 
Displaying posts 1 - 15 of 114
04:43 PM on 09/11/12
#2
Thomas Nassiff
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It's a long read, but if you guys like this style of article on the homepage, please tell me so in the replies. As usual when trying out something new we want to hear whether you guys like it. I just got in the mood to write a column about this and I like writing about the business side of the industry, so if it's something that you guys want to see more of, maybe we can make it a more regular feature. If you guys hate it then I'll just go cry in my room.
04:46 PM on 09/11/12
#3
Jeff_Ryan
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I don't hate the idea of a long article like this right on the home page. It's not like the entire thing shows up on the front page and it will probably attract more people / generate more discussion.

Unless the service was super cheap, I probably wouldn't subscribe. I spend a ton on vinyl and have my digital downloads on my computer. I'd definitely look over the features and consider it though.

Unless an update gets announced tomorrow, which I seriously doubt, I'm going to buy an iPod Classic.
04:49 PM on 09/11/12
#4
Beatzero
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Just last month Warner Music Group posted their revenue from the last quarter, where digital music sales finally surpassed physical music sales. Over half of the digital sales came from streaming services.

I think it's interesting that this new Apple product keeps getting compared to Pandora, as I feel like it should be competing more with Spotify. Streaming music seems to be where the industry is going, and I'm all for it. The only problem with it is that people aren't used to the profits made by streaming, unfairly comparing them with an iTunes purchase. As soon as customers and labels see that a pay-per-listen system is more valuable than a one time purchase, things will take off much quicker.

Thoughts?
04:50 PM on 09/11/12
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mattregan
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RIP to Pandora, eventually.
04:53 PM on 09/11/12
#6
Beatzero
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It's a long read, but if you guys like this style of article on the homepage, please tell me so in the replies. As usual when trying out something new we want to hear whether you guys like it. I just got in the mood to write a column about this and I like writing about the business side of the industry, so if it's something that you guys want to see more of, maybe we can make it a more regular feature. If you guys hate it then I'll just go cry in my room.
I think that something as big as this that is going to affect everyone's listening habits, it's more than appropriate.

Have you written elsewhere about the business side of music? I've become a lot more interested in that side recently and have been writing for Hypebot about the same type things, I'd be interested to hear your views.
04:54 PM on 09/11/12
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Thomas Nassiff
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Just last month Warner Music Group posted their revenue from the last quarter, where digital music sales finally surpassed physical music sales. Over half of the digital sales came from streaming services.

I think it's interesting that this new Apple product keeps getting compared to Pandora, as I feel like it should be competing more with Spotify. Streaming music seems to be where the industry is going, and I'm all for it. The only problem with it is that people aren't used to the profits made by streaming, unfairly comparing them with an iTunes purchase. As soon as customers and labels see that a pay-per-listen system is more valuable than a one time purchase, things will take off much quicker.

Thoughts?
What do you mean half of the digital sales came from streaming services? Obviously labels get money from services like Spotify, but those aren't "sales" in the normal sense of the word. And while Spotify offers increased revenue to labels, can it really top how much money they make off sales? The amount of money you get off a Spotify stream is so minimal.
04:55 PM on 09/11/12
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Thomas Nassiff
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I think that something as big as this that is going to affect everyone's listening habits, it's more than appropriate.

Have you written elsewhere about the business side of music? I've become a lot more interested in that side recently and have been writing for Hypebot about the same type things, I'd be interested to hear your views.
Not really but I've written a few business-related articles here. I did one about the rising sales of vinyl, another at the end of last year that sort of summed up the end of the year sales report. Then I did one earlier this year about Kickstarter, and I used to do the weekly album sales posts but I've been too busy for that recently. Hoping to start this "Music Biz" thing as a fairly regular column/feature if people are interested in reading.
04:55 PM on 09/11/12
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HeyItsAllyssa
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It's a long read, but if you guys like this style of article on the homepage, please tell me so in the replies. As usual when trying out something new we want to hear whether you guys like it. I just got in the mood to write a column about this and I like writing about the business side of the industry, so if it's something that you guys want to see more of, maybe we can make it a more regular feature. If you guys hate it then I'll just go cry in my room.
I like lengthy reads and especially this one. I appreciate the fact that you like writing about the business side of the industry. I have been curious to see if Apple was going to try and take on the internet radio industry and looks like they are.

My question that has been perplexing me since Spotify came out was, do bands/artists actually see revenue or anything from having their music on there? I have seen some reports of bands claiming Spotify screws over the artist whereas others have preached that Spotify makes money for the bands. Do you know by chance either way?

Thanks for the post. Excellent read!
04:59 PM on 09/11/12
tell that mick
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It's a long read, but if you guys like this style of article on the homepage, please tell me so in the replies. As usual when trying out something new we want to hear whether you guys like it. I just got in the mood to write a column about this and I like writing about the business side of the industry, so if it's something that you guys want to see more of, maybe we can make it a more regular feature. If you guys hate it then I'll just go cry in my room.
Would love to see more long form posts like this on AP.net, but perhaps in a different layout than the typical news posts. Give it a bit more distinction.
05:06 PM on 09/11/12
Beatzero
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What do you mean half of the digital sales came from streaming services? Obviously labels get money from services like Spotify, but those aren't "sales" in the normal sense of the word. And while Spotify offers increased revenue to labels, can it really top how much money they make off sales? The amount of money you get off a Spotify stream is so minimal.

Take a look at Streaming Contibutes 25% To Warner Music Group's Digital Bottom Line and Warner Music Group Corp. Reports Results for the Fiscal Third Quarter Ended June 30, 2012

The problem with using a term like "sale" is that it no longer refers accurately to how music makes money. With streaming music services, users don't need to "buy" a track or album, but their listening to it makes money nonetheless (which is paid to the labels at a royalty rate, further to be paid to the artists at the rate of the label). Spotify makes it's money through advertising and premium accounts. When I last checked, Spotify had 10 million users, 3 million of which were premium users.

But even at $10 a month, if you average 300 songs a month (10 songs per day), only 70% of that goes towards the artists. So take your $7 and divide that by upwards of 300 songs, and it's easy to see why the rates are what they are. That's why everyone is so up in arms over this rate, because it's so low. When you multiply that by all of the users, and then multiply that each year, it adds up quick, but people can't see into the future and understand that a low rate on a per-play basis in exponentially outweighs a single $0.99 purchase.
05:11 PM on 09/11/12
Beatzero
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My question that has been perplexing me since Spotify came out was, do bands/artists actually see revenue or anything from having their music on there? I have seen some reports of bands claiming Spotify screws over the artist whereas others have preached that Spotify makes money for the bands. Do you know by chance either way?

From what I've read, Spotify pays 70% of its earnings to the rights holders. Legally, they have to pay labels to use their catalog, so there isn't a way around this. The issue with bands and artists though, is that the label usually owns the majority of an artist's earnings. So while 70% goes to the rights holders, only a portion of this actually goes to the artist/band, at the artist royalty rate which the band agreed on upon signing into a contract.

So:
Spotify --(70%)--> Label ---(?%)--> Artist

in reality, the band gets a percentage of a percentage. It all depends on the deal they signed into, which is why it works for some bands and not for others.




Also, if anyone's interested, I wrote an article on this:
Why Streaming Music is the Way Forward
05:11 PM on 09/11/12
anamericangod
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Do not like this style of article on the homepage at all.
05:12 PM on 09/11/12
Thomas Nassiff
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I like lengthy reads and especially this one. I appreciate the fact that you like writing about the business side of the industry. I have been curious to see if Apple was going to try and take on the internet radio industry and looks like they are.

My question that has been perplexing me since Spotify came out was, do bands/artists actually see revenue or anything from having their music on there? I have seen some reports of bands claiming Spotify screws over the artist whereas others have preached that Spotify makes money for the bands. Do you know by chance either way?

Thanks for the post. Excellent read!
They definitely see revenue. I recently talked to a marketing person at a pretty big indie label about this, and you just have to change the way you think about things. No one sells 1 million records anymore, but between digital and physical sales, then the combined Spotify/Rdio/whatever streaming revenue, then the monetization of your YouTube account, labels do see a decent revenue at the end, it's just not the same as it used to be. The guy a few posts above me made a pretty good post about this topic too.
05:13 PM on 09/11/12
Thomas Nassiff
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Do not like this style of article on the homepage at all.
Why? It doesn't show up on the actual homepage at all. It has as many characters on the homepage as any of the other posts that say "Read more." I'm interested in why you don't like it. Obviously it's super long when you click on it, but then again it's obviously not for everyone to read. No news post is.

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