Apple to launch subscription bundle – we called it!

In MIDiA’s 2020 Predictions report published in December 2019 we predicted that tech majors would start creating subscription bundles, with Apple leading the fray. Lo and behold, news has just come out that Apple is working on ‘Apple One’ – a multi-genre subscription bundle that will include Apple Music, Apple TV+, Apple Arcade and Apple News+.

This is what we said back in December:

“Expect Apple to experiment with paid bundles. Adding TV+ to its student Apple Music package is another test case and may soon see Arcade folded in also. With a global recession looming, Apple and Amazon will be well placed to grow market share.

We called it!

So why is Apple doing this, and why now?

With smartphone sales slowing, Apple needs another growth driver to maintain revenue growth. It is making this move now because, one, it needs the transition to start soon, and two, it is looking to profit from the recession. Standalone digital subscriptions are contract-free and so are vulnerable to cancellation. Additionally, they skew towards Millennials – the segment most likely to be hit hardest by any workforce reductions. Consumers who find themselves having to tighten their belts will not want to simply ditch their digital entertainment, however – it has become too important to them. So, a multi-subscription, value-for-money bundle will become particularly appealing during a recession. Apple is thus hoping to pick up price-sensitive subscribers during the economic downturn.

Apple also has an ace up its sleeve: device bundles. As we wrote in December:

“Currently, Apple’s mix of premium, standalone subscriptions are educating its user base that they have a clear monetary value. Apple will start to bundle these together with devices in order to maintain revenue growth in its otherwise slowing device sales segments. The initial bundling of Apple TV+ for free for one year may help acquire market share but it also lays the ground for a more comprehensive and structured bundling strategy. By tying subscriptions into long-term, need-to-have relationships – i.e. phones and shipping – […] tech majors could gain at the expense of standalone subscriptions.

Bundling used to be the sole domain of Telco’s but the tech majors are looking to get in on the act. Apple can use Apple One to increase device prices, e.g. pay $200 more to get an iPhone with a lifetime of unlimited music, video, games and extra cloud storage. By doing so it both increases device revenue (and after all, Apple is still a device company and is measured that way by investors) and taps into an entirely different purchase decision cycle. Devices are need-to-have and if you are in the market for a high-end device, adding on 15% for unlimited content is a much easier sell than trying to sell the subscription standalone.

In doing all of this, Apple is of course taking a leaf out of Amazon’s book. Amazon has built the core of its streaming businesses around the Prime bundle. In doing so, it has the additional benefit of creating a recession-proof bundle (everyone still needs to buy stuff) – one which is proving its worth already, if it’s incredibly successful Q2 is anything to go by. As we enter the recession, standalone subscriptions like Spotify and Netflix are vulnerable to increased churn. Apple and Amazon will be waiting to pick up the pieces.

What Beats Music Needs to Do to Be a Success

Next week Beats Music will finally launch, after arguably the most hyped music service launch in the history of digital music.  CEO Ian Rogers published a blog post over the weekend that dives into some of the thinking behind the service and some of its functionality.  Early signs are that it is a well designed and programmed service, but that alone will not be enough to make it a success.

Rogers cheekily labelled competitor services as ‘servers’ rather than services and there is no doubt that Beats Music has put addressing the Tyranny of Choice right at the heart of its strategic mission.  Beats Music has invested heavily in a host of cool features and top quality editorial and deserves great credit for doing so, but it still won’t be enough.  Beats Music is another 9.99 subscription service and 9.99 is still not, nor ever will be, a mass market consumer price point….at least not until years of inflation have taken effect. Just 5% of consumers currently pay for subscriptions in the US and the UK and the lion’s share of that is down to Spotify.

It is a massive – i.e. currently impossible – challenge for Beats or any of its soon-to-be competitor AYCE subscription services to get the headline pricing down – that is instead the domain of a new breed of innovative services such as MusicQubed, Bloom.fm and Psonar. But where Beats does have the ability to at least make their offering feel cheaper is with bundling.  On this front a lot has been made of Beats’ partnership with AT&T.  Though it is great to have such a high profile partner pushing subscriptions into the US it feels like a missed opportunity.

AT&T is a Missed Opportunity

Instead of being a long term bundle, the AT&T deal is in fact a promotional partnership, with three months free before reverting to a full priced $15 p/m deal.  As we recommended in our Telco Bundling White Paper last year, the best practice is to transition to a subsidized bundle with the end user paying either nothing or a discounted rate (much preferable to labels).  While a three month free trial is a fantastic way to deliver value and get users hooked, the leap from zero to $15 p/m is just too big.

Granted the deal is an innovative ‘Family Plan’ but I am not convinced consumers will see the value.  Core to the value proposition is being able to access the service across 5 people and 10 devices, which compared to other subscription services is strongly differentiated.  But multi-device value is actually the value of the label licenses not consumer value.  Apple and Samsung customers do not pay a premium for every additional device they want to play music downloads they purchased from the iTunes and Play Stores.  iTunes accounts are already inherently family plans in many households with no price premium.   As I have been saying for years: we are in the per-person age, not the per device age.  Consumers should not pay a premium for multiple device support. Labels need to accept the realities of the modern day multi device consumer and not try to slice the proverbial baloney.

Artists and Songwriters Will Feel the Family Plan Pinch

Also the Family Plan also raises the tricky issue of whether the fact that this would translate into $3 per head per month effectively means three times less rights pay out per track.  Big labels and publishers won’t feel the pinch so much as they’ll still be getting their 10%/20%/30% shares of revenue.  In fact they’ll be 50% better off as it will be a share of $15 not $10.  But artists and songwriters only have small catalogues of music so they’ll feel the impact of track play revenue being a share of $3 not $9.99.  And given that a family is likely to have diverse tastes, especially between parents and kids, artists are unlikely to get plays across all of the family members, where of course a label with a diverse portfolio of artists will.

It’s the Headphones, Stupid

But enough of the hurdles, I did promise with this blog entry’s title a solution. Despite all of the hype I do genuinely believe Beats Music could be a game changer if it is willing to properly leverage all of the assets at its disposal.  Beats has a hugely valuable brand and route to market in its core headphone business.  And although Beats is now facing fierce competition, it remains the stand out youth headphone brand, for now.   As great a partner as AT&T may be, they’ll still most likely only reach the same high value, data plan power user, music aficionado that all the other subscription services have been super serving.  And as such Beats Music will get far less bang for its buck than it should.

Instead Beats Music should focus on hard bundling into Beats headphones with a 3 month free trial followed by a subsidized $5 12 month commitment subscription. It really is that simple. ..well the commercials aren’t but the proposition is.

Among Beats’ headphone customer base are hundreds of thousands of young, brand conscious music consumers that value high quality music experiences and are not yet subscription converts.  If Beats fully embraces its new family member and puts it at the heart of its core product range then Beats Music might just reach a whole swathe of new consumers that the incumbent subscription services have not yet managed to.  If instead it treats Beats Music as an awkward digital appendage then it will wither on the vine.  Here’s hoping Beats opts for the former.

Sonos and the Digital Era Music Customer

Sonos recently announced its Play1 wifi speaker, a product that could be a great asset for the music industry if it is utilized properly.  Sonos have been pioneering the multi-room digital audio market for years now and continue to have a fairly clear run at things with neither Apple nor Google showing any truly concerted intent, nor any of the traditional CE companies sufficiently upping their games.  But for all its innovation excellence Sonos has predominately remained the domain of the higher spending tech enthusiast (though significantly below the audiophile segment).  With the Play 1 priced at $199/£169 Sonos is making a play for a much more mainstream flavor of customer and in doing so could help the music industry create a revenue beachhead among a new generation of music customers.

The Digital Era Consumer

We sit on the cusp of what will be a crucial five years, a period that will determine whether consumer music revenues will return to long term growth or instead migrate downwards to create a smaller market concentrated around high spending enthusiasts.  The first wave of digital music revenue growth was all about monetizing the highly engaged early adopters.  Revenues still shrank because, among many other reasons – not least piracy, these consumers were shifting their spending from albums to tracks. But at least it was a clear transition path.  Now streaming subscriptions are doing a solid job of migrating many of those same consumers back up to higher spending.  What they are not doing such a great job of is bringing new buyers into the fold.

Consumer recorded music revenues are facing a demographic pincer movement with older customers falling out of the habit of buying music (and not going digital) while many younger digital natives simply never acquired the habit of buying music.  Subscription services can, and should, be the natural entry point for these consumers but 9.99 remains a key stumbling block.  Now a new opportunity is emerging as these customers age, their lifestyles change and their disposable income increases.  The first cohort of Digital Era Consumers (i.e. those born since the late 1980’s who have had digital experiences since their teens) are now in their mid twenties and beginning to settle down with steady jobs, move in with partners, get their first apartment etc.  All of which most typically corresponds with spending less time out and more time at home.  Enter the opportunity for subscription services and devices like the Play1.

While older consumers have been abandoning the living room hi-fi in favour of spending ever more money on the TV and various boxes below it, Digital Era Consumer have less entrenched relationships with the TV and linear programmed viewing.  Get the timing, product mix and pricing right and there is a fantastic opportunity to persuade these consumers to start investing in next generation home hi-fi.  The sweet spot for music spending is the intersection of two lines: music engagement on average declines with age while spending power increases.  Digital Era Consumers represent that point where the two lines meet.  This is the time to ensure some of that spending is diverted from home TV technology to home music technology, thus establishing the foundations for future music spending.

The Play1 is such a good fit for this strategy because it delivers  a genuinely high quality experience (especially when used in a sensibly positioned stereo pair) for an eminently affordable price.  Bundle that device with 3 or 6 months worth of a free trial of a music subscription and suddenly you have a highly compelling holistic music solution for the home.  Of course this is not just a Sonos opportunity, bundling music subscriptions with affordable digital home audio equipment simply has to be the next step of digital music product strategy.  (And it doesn’t take a rocket scientist to deduce that Beats will most likely bundle their service with headphone sales).

Just Press Play…

The simplicity of user journey will be key though.  Relying on a consumer to buy a device, then go home and register for a subscription and then to hook that service up to the device just won’t cut it.  Retailers will need to be given allocations of subscription accounts that will be auto associated with a device at point of sale, where the consumer will also give their email address.  The subscription service will have to be natively integrated into the controller app (though not necessarily the circuitry of the hardware as Spotify has been doing as this limits future consumer choice). When the consumer gets home and hooks the device up to power and wi-fi the music service starts automatically.  The experience really should be as simple as ‘play’.

For CE retailers this is an opportunity to drive a new era of music hi-fi sales (particularly as the docking station segment seems to be struggling).  For music retailers – those that are left – it is a chance to create a new relationship with consumers.  Take the example of HMV in the UK who are currently locked in a Quixotic battle with Apple.  Trying to compete as a download store is fighting yesterday’s battle.  The traditional retailers lost that fight and reopening hostilities now is only going to serve to expend scarce resources. But a bundled hardware-subscription offering could bring in swathes of new Christmas / Holiday season customers, baked into a long term relationship not a one-off transaction.

It is time for the record labels and music services to invest in retailer partnerships to ensure that devices like Sonos’ Play1 deliver exactly that proposition to Digital Era Consumers: Play. For a device to be able to play unlimited music out of the box is a compelling proposition and a genuine opportunity to drive subscriptions out of the early adopter niche they currently occupy.