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Is Apple Preparing to Upset the Streaming Music Apple Cart?

by Michael Goodman | 3月 10, 2015

Much to the chagrin of many in the music industry, Spotify, Pandora, and other streaming music services have made it too easy for subscribers to legally stream any song they want from their free, ad-supported services. While freemium services generate advertising revenue they also undercut other more profitable downloading and subscription business models.

Universal Music Group’s CEO, Lucian Grainge, directly attributes declining download sales at Apple’s iTunes store to Spotify’s free tier citing Spotify’s own research which shows that 12% of former iTunes customers have become Spotify users, and of them, 60% use Spotify’s free ad-supported tier. Executives at Universal Music Group (UMG), Sony Music and Warner Music have not been shy about expressing their desire to replace the “freemium model” with paid subscriptions.  According to UMG’s Grainge “ad-funded on-demand is not going to sustain the entire ecosystem of the creators as well as the investors.”

With Apple’s help the record labels want to transform the digital music landscape once again. According to various reports, Apple is in discussions with the record labels to re-brand and re-launch its Beats music subscription service without a free ad-supported tier. According to reports, after a trial period users will be required to pay an $8 a month subscription fee. In order to sweeten the offer, Apple is said to be in discussions with the record labels regarding windowing and exclusives to ensure that the best content is only available to premium users, and if Apple is willing to pay the price, only to Apple’s premium users.

While this will not completely transform the music industry and bring back the glory days of a decade ago the recording industry must do something to reverse its downward slide. Until recently there has not been much the labels could do as they have been locked into licensing agreements, however, those deals (at least with Spotify) expire this year (2015) and the labels are adamant about changing the terms of those agreements. Apple provides the labels with leverage in negations with Spotify since Spotify will not want to abandon its freemium tier without a fight.

Spotify will point out that the freemium model has been fundamental in helping curtail piracy and that it provides an entry point to a paid subscription. And to a certain extent they are correct; however, all the record labels have to do is look at their balance sheets and see that the status quo is not sustainable. Too many people are paying a fraction of what they did five years ago (assuming they are paying at all) for the same or more music. Spotify can argue for the freemium model all they want but in the end “content is king” and the record labels get the final say on what business models they support.

Clearly things need to change but the record labels must be aware that this effort will not cure all that ills the music industry. If successful this effort will likely help grow subscription revenues but it does little to address all the music being consumed for free on YouTube (which will likely grow exponentially if freemium tiers are eliminated) or change the fact today’s business models enable consumers to spending significantly less for their music than they did a decade ago.

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