Apple revolutionized the music industry with the launch of the iPod and iTunes in 2003, when it became the first company to monetize music successfully for the labels after Napster’s underhanded challenge in 2001. Since then the landscape has shifted away from downloads and given rise to interactive streaming services such as Spotify, Deezer, and Rdio. Apple’s response, since June 30th, is Apple Music, a new and integrated package of music offerings developed with Jimmy Iovine, Dr. Dre, and Trent Reznor of Beats Music, which Apple acquired recently.
Features and functionality
A short description of the service follows, and we note some differences with existing music delivery platforms.
The first is integration with Siri, Apple’s voice search assistance system. Siri can play a song by name or find a fit for a song given some criteria. Eddie Cue, Apple’s Senior VP of Software Development, demonstrated this last week by (i) calling for a playlist of the top ten hits in the genre Alternative, (ii) asking for a song from the “Selma” soundtrack, and (iii) requesting the top hit in May 1982 (Joan Jett & the Blackheart’s I Love Rock ‘n’ Roll)1. The user can play music hands-free, which is good, and likely safer, for workouts and driving. Voice activated music playing is not yet a part of Spotify’s platform.
Apple is offering standard Internet radio, but unlike Pandora, humans will curate its playlists, not algorithms. And it seems that Apple’s catalog of songs will be much larger than Pandora’s. It also appears that Apple is not facing the same restrictions that Pandora did in Europe, where Pandora is not yet licensed for webcasts. This could be because the package of music purchased from the labels was for the more expensive interactive streams and Apple could negotiate better terms for non-interactive streams everywhere. It could be a death knell for Pandora’s global ambitions. Europe is anyway a big target market for Apple, not least because it is the home base of streaming rivals Spotify (a Swedish company) and Deezer (a French company). Apple’s efforts in Europe led to the Cupertino giant recruiting former BBC celebrity DJ Zane Lowe for a leadership position. Apple Music will be broadcasting as terrestrial radio station too in a regular and personable 24-hour format without ads. The radio station, Beats 1, will be hosted by a variety of DJ’s in Los Angeles, New York, and London.
Apple Music also comes with a sophisticated recommendation engine developed with Beats Music, and bolstered by human curators. According to Iovine, “[the curators] are going to help you with the most difficult question in music: what song comes next?” It is not clear, though, how much effort is involved here, for it would seem a herculean task to work one-on-one with users. Tidal, the new online streaming service that debuted a few months ago is also in the business of personable advice, but not Spotify, Deezer, or Pandora.
Apple Music intends to build upon the direct user-to-artist connection in a way that few other services do. PledgeMusic, Kickstarter, or Indiegogo music fans are becoming more involved with artists already, and voting with their money pledges. Apple Music is offering more communication, rather than creating a microfunding service. It is still very much in its infancy, but it would allows artists to release content direct to fans who can only access it after they have subscribed to the artist via Apple Connect. Such special releases may include lyrics to new songs, exclusive performance videos, behind the scenes content, and even original recorded material. Spotify, incidentally, is already using social media to connect fans successfully with each other and their artists, relying on a better proven user-to-user model (see the article “Spotify’s Clout” in this issue of The MBJ).
Regarding the backwards compatibility of Apple Music, all of the songs a user has purchased on iTunes will still be saved onto their device or can be stored in iCloud. Music that is available for download but has not been licensed for streaming, such as The Beatles catalog, can be incorporated into playlists once purchased. Songs and playlists from the streaming service can also be downloaded from mobile devices for offline listening. The approximately 300,000 subscribers of Beats Music that Apple acquired last year will have the opportunity to transfer their existing playlists over to Apple Music, at which point their subscription to Beats will be canceled.
Finally, Apple Music will be available on the Android marketplace starting in the fall. However, there will be an additional charge for access to the Beats 1 radio, as well as for some features of Connect that iPhone users will receive for free. Quality wireless playback is also featured, and will be perfected at the year’s end, through an arrangement with Sonos, a Santa Barbara audio company. Tidal, but not Spotify or Pandora, is also vying for the hi-fi streaming market.
Lowering the Apple Tax
One of the most widely touted features of Apple Music is the larger share of revenue the service will pay out to artists. Apple and iTunes set the standard for digital licensing with the licensing agreement between Apple and the record labels in the early millennium. The so called “Apple Tax” gave the technology giant a 30% share of each 99 cent download with the rest of the revenue going to the record label (who then paid the artist a royalty of between 10 and 20 percent of the remainder, provided the artist broke even).
However, and contrary to what is now generally asserted, this was not an original deal structure pioneered by Steve Jobs. Rather, the original agreement between the labels and iTunes was the extension of the existing revenue model in the physical world, where distribution costs were worth 30% of the value of an album or single. As each major owned its distribution company, in the world of physical sales that 30% was paid in-house; i.e. back to the label itself minus costs. When the labels capitulated all distribution in the digital space to Apple, Apple was paid in the same proportion that the labels had paid themselves. To the labels, it was a business model they understood and it made sense, for they could not possibly be expected to know how to sell effectively recorded music online (earlier, they had tried with MusicNet and PressPlay and failed).
Apple is now improving on this 70-30 deal, and, according to iTunes Content Vice President Robert Kondrk, it is agreeing to pay 71.5% of gross revenues in the United States, and an average of 73% in foreign markets2. Originally, Apple was not going to pay any monies to the record labels for the three-month trial period it was offering to entice users to try the service. This would have meant no artist royalty earnings, and megastar Taylor Swift openly criticized Apple in a well-publicized letter. It set the right tone for artists, their labels, and also for Apple. Eddie Cue, Apple’s Senior VP, then reversed course. This concession to Swift, and the increase in the share paid out to the labels, suggests that Apple Music has inaugurated a friendlier environment between artists and the technology companies that use their business.
The advent of Apple Music, therefore, could put pressure on competitors such as Spotify and Deezer to raise the percentages they pay out too. Yet it must be remembered that, even with these changes, Apple’s new streaming distribution deal is almost identical to the one that pervaded the traditional music business model before the Internet era. In a sense, not much has changed in distribution, so it is worth asking if artists are barking at the wrong tree when they complain about the paltry revenues they collect from streaming sites.
If labels no longer bear the cost of manufacturing and distributing a physical product, nor does breakage during transportation affect profit margins, why not shift the burden of complaint to the labels? Moreover, as reported by London’s Financial Times, the decreasing barriers to entry into the market through channels such as YouTube have lowered Artist and Repertoire costs by a fifth3. Therefore the best chance at seeing a significant rise in the amount of money talent pockets from streaming would be for the artists to stop pressuring streaming services, and instead seek more fairness and transparency from the labels themselves.
The Apple Music Threat
The success of Apple Music is ultimately dependent on whether or not it can generate a large base of users to support it. Although it is a late entrant into the market, and lags behind Spotify, with its twenty million paid users and forty-five million free users, it does have competitive advantages. Its treasure chest of free cash is worth $200 billion and must be a concern to potential rivals. While Spotify is well capitalized and recently raised $500 million in response largely to the Apple threat, it is still absorbing substantial losses. In 2014 these amounted to under $200 million4. Apple’s decision to increase the percentage of revenue it pays to artists, while only marginally beneficial to the artists, could cause the labels who control the rights to force Spotify to match Apple’s rate or risk losing key artists from their catalog. That would make the cost of doing business harder for Spotify, who unlike Apple is entirely dependent on streaming revenues.
Apple’s second advantage is that Apple Music will come installed on all 63 million iPhones worldwide. The number is also more than likely going to increase in the fall when the iPhone 6S is released. Apple has reportedly bet big on the 6S and is ramping up production to 90 million units5. While only a fraction of iPhone users will likely become paid subscribers, the ease of signing up through an already installed app that takes its payment through a user’s Apple account is undeniable.
Recapturing the iPod?
Where Apple Music fits into the Apple ecosystem is much different from the space the iPod occupied when it launched with the iTunes in 2003. Music is a much less integral part of Apple’s business model, which is now based on the sale of smartphones as well as computer hardware and accessories.
But the coolness factor of Apple’s rebirth in the new millennium has forever been tied with music, and the Apple brand is now making itself even more accountable for the success of its music strategy. Part of it is survival: the music trade is the bearer of things to come in digital markets, the canary of a modern coalmine where intellectual property’s value is constantly reappraised. Apple does not apparently believe in using free music to promote sales beyond the trial period that ends in September and the model will convert to a paid-only system.
Apple, in short, is becoming a key chaperone of the music subscription economy, and in so doing is keeping alive the promise of much higher overall global returns for recorded music. It will also have helped right the wrong of single song sales that iTunes had per force promoted in order to sell iPods. Musicians everywhere should rejoice.
By John Lahr
1. Nakashima, Ryan. “Apple Music Brings Change to Streaming, but Is It Enough?” Yahoo! News. Yahoo!, 9 June 2015. Web. 09 July 2015.
2. Resnikoff, Paul. “Apple Responds: ‘We Pay 71.5 Percent of Streaming Revenue Back to Artists…'” Digital Music News. Digital Music News, 15 June 2015. Web. 11 July 2015.
3. Ford, Jonathan. “Taylor Swift Is Fighting the Wrong Part of the Music Industry.” The Financial Times. The Financial TImes, 5 July 2015. Web. 11 July 2015.
4. Cookson, Robert. “Apple’s Deep Pockets Pose Threat to Spotify in Music Battle.” Financial Times. The Financial TImes, 22 June 2015. Web. 11 July 2015.
5. Pramuk, Jacob. “Apple Preparing Record Number of IPhones: Report.”CNBC. CNBC, 08 July 2015. Web. 11 July 2015.