Barrels of ink have been spilt hypothesizing Apple’s next move in music given the mass market transition to streaming and subscription music services has finally begun. I am responsible for a least one barrel of that ink, and am on the record as of 5 1/2 years ago speculating that Apple’s entrance into the subscription music market was imminent. In my defense, that was back in a time when there was only one music device in the market that mattered... the iPod. Back then, Apple could have flipped on a subscription music service and secured their place as the dominant force in music for decades more. Of course they didn’t do this, as this would have instantly cannibalized their still very large and important music download sales revenue. Those of us that were still happily shelling out several hundreds of dollars a year would instantly convert to only playing $10/month. The revenue loss from the hardcore music buyer wouldn’t (yet) make up for the slight increase in annual spend from the rest of the iTunes customers. Instead, Apple has been playing the financially prudent game where they can watch the revenue curves... when the projected subscription revenue line crosses the music download revenue line launch the full on-demand streaming service (that they inevitably have had working in the basement of Cupertino headquarters for years).
The wrench in this strategy many years later is, of course, Android. Now instead of owning the entire mobile music device market, Android has come along and turned iOS into a minority share player. While Apple could still launch a successful subscription music service now, they are faced with a “sophie’s choice” - play to win at streaming music (and maintain their leverage over the rest of the market) or dig their heels in deeper on an ever weakening iOS lock-in strategy. For the record, I am no fan of lock-in tactics, and generally think they are all doomed to fail - but given Apple’s choices I think this is likely the path they will take.
The interesting historical context for all of this is that it was Apple’s abandonment of a lock-in strategy that helped them secure such success in the mobile market. When the iTunes Music Store was first launched, it was Mac only... the tight ecosystem between iPods and iTunes (on Macs) were used to lure the Windows consumers to switch to Macs. Given their minority share (< 10%) in the PC market, this strategy did not bear much fruit. Apple then made the somewhat decision to bring their software to Windows - one of the few times they have done this (along with the likes of Safari & QuickTime). Bringing the iTunes Music Store to the mass majority of the market thereabout fueled massive iPod sales, which begat the iPhone, which begat a new massive revenue stream for Apple in iOS apps.
So, I’d argue that if Apple brought an iTunes subscription music service to iOS and Android they can “win” again. BUT, given the notoriously high-complexity/low-margin business that subscription music is... I think they will continue to cede subscription music to the other players. Apple execs have said that music is multi-billion dollar business for them that “is run at breakeven”. By continuing to focus on the other aspects of the iOS platform, they can get a much higher return on that investment while still generating low-complexity/high-margin revenue from music by taking their 30% vig on all music subscriptions that come in through their App Store.
Where in 2007 I’d have bet big money that Apple would enter subscription on-demand music, I’d now bet bigger money today that they won’t. My caveat is the much rumored “iRadio”... I believe the reports postulating that they will compete with Pandora on a “non-interactive” radio service. In my opinion, this has much less to do about being in music as it is about improving their iAD platform. They can use radio as a loss-leader to both create additional inventory for the ad platform while simultaneously gathering very valuable user taste and behavioral data that they can then leverage and offer to all of the other iOS app developers.
In a perfect world, a streaming radio service is an all-around win for Apple... they build a better advertising platform, they offer a programmed streaming experience that has proven both more popular and more cost-efficient than on-demand subscription services, they increase sales and extend the life of downloads, their incremental download sales help drive the sales of higher storage capacity iOS devices, all the while avoiding competing directly with the subscription streaming services (of which they take a nice profitable cut of the revenue on sign-ups through their platform).
There will certainly be a huge number of people that will try, and like, iRadio. For many having that experience only on their iOS devices will serve their needs just fine. A minority share of music listeners is probably “good enough” for Apple to help move their advertising and OS platforms further down the road. But, as the device market continues to fragment - with people enjoying their music on their iPads, Androids, Rokus, car stereos, Sonoses, and more - a platform/OS lock-in strategy will prove to be a short-lived advantage in music.
All of the above is a very long-winded way of saying, don’t count out the other players - both on-demand subscription and non-interactive radio services.. Apple’s entrance into streaming music will ultimately help build the awareness and userbases of those services that are dedicated to being fully-cross platform and being everywhere their listeners are.
Friday, April 26, 2013
My most recent guest post for Billboard... this time on iTunes.