Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle. Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base. That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters. This is why Apple has to get serious about streaming fast: it is scared of losing its best customers. It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared. This is streaming music’s mutual fear factor:
Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience. Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners. But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device. Suddenly the handcuffs slip off. This is why Apple has to get streaming right in short order. It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans. The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers. On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates. Apple has provided the core addressable market for streaming services for the last five years. Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services. Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books. Fair play or foul, the power of the retailer is huge. Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.
None of this is necessarily bad for the market either. In fact it could be just what the subscriptions business needs. To finally focus on green field opportunity beyond the confines of the Apple elite. Nor should Apple even limit its subscription focus to streaming or to music. The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest. Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device. Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering. Something far out of the reaches of the current product roadmaps of any of the stand alone music services.
Can Apple afford to loss lead with music subscriptions to pursue such a strategy? Well, remember Apple’s entire digital music business has been built on loss leading. Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.
In my previous blog post I explained that 2014 was going to be the year of taking digital content into the home. That affordable devices such as Google Chromecast, Apple Kindle Fire TV, Apple TV and Roku are set to drive a digital content revolution by connecting digital content with the familiar context it needs for the mass market. These Content Connectors will transform consumers’ relationship with digital content but they will also turn the existing digital content marketplace on its head:
Breaking down the home entertainment silos: our digital content experiences have evolved entirely isolated from our other media experiences. We multitask because one device is connected and one is not. Our homes have become a collection of content experience silos. Content Connectors break down those walls, brining our digital content experiences onto that most un-connected of devices, the TV.
On-boarding late adopters: In most developed markets, most consumers are digitally engaged, using Facebook, YouTube, email, tablets etc. on a daily basis. These are digitally savvy later adopters, where their behavior lags is in paying for content. Sure, some will never pay, but others simply haven’t yet been given a solution that makes sense to them. Content Connectors can change that by giving digital content experiences familiar context in the home.
Smart boxes will leave smart TV’s still born: TV manufacturers are still figuring out how to deal with the hangover of having accelerated the TV set replacement cycle too aggressively with HD. Too many homes have perfectly good HD ready flat screen sets that they won’t need to replace anytime soon. So manufacturers are desperately pushing 3D and Smart TVs as a reason to replace. The problem, for TV makers not consumers, is that Content Connectors turn ‘dumb’ TVs into Smart TVs for a fraction of the cost. A TV isn’t a computing device but plug a Content Connector into it and it becomes one.
Breaking down media industry walls: Hardware used to create great big walls between different content genres. TVs were for broadcast video, DVDs for recorded video, CDs for audio, games consoles for games. Multifunction devices such as smartphones and tablets started to erode those barriers by being content genre agnostic. Apple’s iTunes Music Store became the generic ‘iTunes Store’ and now Content Connectors want to take this paradigm shift even further by freeing the biggest screen in the home form the constraints of broadcast video.
Leaving stand-alone stores and services stranded: The disruptive threat of the TV’s liberation is immense. Broadcasters instantly lose their monopolistic hold on the TV and find themselves in the middle of a disruptive threat pincer movement: first non-traditional broadcasters like Netflix and YouTube can get themselves right into the traditional TV heartland; secondly non-video content suddenly finds a home on the TV, whether that be music, photos or games. No matter, all of it competes for TV viewing time. And no coincidence that Amazon’s Kindle Fire TV is equipped with a game controller. What’s more, if you only offer video – which of course applies to most TV broadcasters – you look decidedly limited in the Content Connector era of multi-genre content offerings.
Using the TV to get consumers over the ‘ownership hump’: While industry leaders obsess over how to make subscription business models work, most mainstream consumers have not even started thinking about moving from the ownership paradigm to a consumption one. That shift will need a generation to truly play out but Content Connectors will give the process an initial adrenaline shot. How? By putting digital content onto the device that consumers already associate with ephemerality. The TV is not an ownership device nor has it ever been one. At most it is a device on which temporary copies are viewed before being deleted. But the majority of the time it is purely access based content consumption. So getting mainstream consumers used to accessing but not owning digital content via the TV is the perfect environment for making an entirely alien concept feel strangely familiar.
Another changing of the guard: The reversing into the CE market by internet, software and PC companies was the biggest disruption the CE sector ever endured. The likes of Sony and Yamaha used to compete in an almost chivalric manner, agreeing on standards and then competing on implementation. Google, Apple and Amazon pursue no such niceties and compete with incompatible platforms and technology, and in doing so are wining the CE war. The Content Connector revolution is helping the same thing happen to content distribution. A new generation of content providers are emerging that collectively have their eyes set on world domination.
The coming shift in the digital content markets could occur at breakneck pace. Within five years Hulu and Netflix could easily have a 100 million paying subscribers and YouTube’s ad revenue could easily be near $8 billion. If the transition process goes the whole distance traditional content walls could disappear entirely. Google Play could move from selling video, apps or music to simply asking consumers: “How would you like to enjoy this content? Watch? Listen? Or Play?” Traditional broadcasters and media retailers should be scared, very scared.