A raging debate is questioning Apple’s ability to succeed in the upcoming streaming music service that will be launched at their developer conference on Monday in San Francisco.
After milking the iTunes profit cow for 12 years, downloads fell 12 percent in the last three years as streaming revenue blossomed and is expected to become dominant delivery mode next year. Facing an impending music revenue collapse, Apple must both be disruptive and cut prices to challenge streamers like Spotify and up their iTunes Radio game to take on Pandora and the terrestrial broadcasters.
Steve Jobs was known for regularly cannibalizing his own product offering, before competitors had a chance to do it to him. This gave Apple edginess as the “new thing,” allowing the company to operate as a closed platform with Apple keeping control over applications, content, and media that run on their platform.
Economists call this strategy building a “walled-garden.” It explains why Apple was able to be the largest capitalized stock on earth, despite not being very profitable. But after Jobs’ death, Apple focused on maximizing profit by just perfecting its existing products.
The latest i-Phone 6 and 6-Plus are just updates that knocked off Samsung features, while iTunes and iPad haven’t changed for years. Jobs as an innovator would have already made radical changes in how music is delivered, to Apple’s customer loyalty.
When it comes to streaming music, Apple is entering markets pioneered by Spotify, Deezer, and Rhapsody that have deep customer satisfaction. With 15 million paid monthly subscriptions and 60 million worldwide users, Spotify will be tough competition.
Apple is expected to announce a subscription music service that will offer unlimited listening and artist-curated internet radio for $10 a month using technology from its $3 billion Beats acquisition. The company’s 700 million iPhones “installed base” Apple company a stellar in-house entré for a streaming music platform.
“Apple is not too late, but they are certainly playing catch-up,” Jan Dawson, an independent technology analyst for Jackdaw Research told the Financial Times. “It’s a crowded market, and they will have to find ways to set themselves apart.”
Apple is rumored to be “blowing-up” the 70/30 revenue percentage split that Steve Jobs pioneered when Apple launched the iTunes music store in 2003. Apple paid out over $10 billion to content providers last year from downloads, subscriptions, and other apps. The structure has been knocked-off by Internet sellers Google and Amazon. But the hefty 30 percent “slurp at the trough” is now derisively referred to as the “Apple Tax.”
Pete Townshend, The Who’s legendary guitarist, made headlines when he called iTunes a “digital vampire” that profits from artists without providing them much support. A $9.99 digital download on iTunes only nets artists a paltry 94 cents— less than a 10% cut. The record company takes $5.35 and Apple keeps the remaining $3.70.
The improved terms being discussed with media companies would apply to revamped Apple platforms such as its long-anticipated Apple TV update and forthcoming changes to “Newsstand,” gateway to digital newspapers and magazines, rather than to its existing App Store terms, which will remain the same for developers, according to the FT
Improving Apple’s terms would make its devices more attractive to content creators at a time when it faces a threat from Google, whose Android’s app store now generates more revenues for developers than Apple’s. This economic advantage has eroded a longstanding Apple advantage of having apps almost always launch first on iPhones.
But Apple has such large market share of music that they cannot be predatory and just cut prices to wipe out the competition. Apple also cannot change “the terms of trade” by asking content providers to only use Apple for streaming. European regulators have been going after Google as a monopoly, and Apple risks being their next target.
Competitors like Google, Facebook, and Snapchat already are beginning to incorporate professional content, from news articles to videos, more deeply into their apps and services. While the Apple Music launch will be the focus of Monday’s event, the company desperately needs radical innovation to achieve its ambitions in media.