What Acquiring Beats Could Do For Apple (And Everyone Else)

Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.

download slow down

There are a number of key considerations and potential impacts:

  • Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
  • Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
  • Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
  • Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
  • Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
  • Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.

There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.


Music Mistakes, Myths and Misconceptions. Part 2: Ad Supported


Continuing my bid to provide more fuel for the ‘music should be free’ fire this is the second in my short series of ‘Music Myths, Misconceptions and Mistakes’ posts, tackling one big ‘free’ issue at a time.  Today’s topic is Ad Supported (yesterday’s post on File Sharing can be found here). 


Ad Supported: 10 Mistakes, Myths and Misconceptions


  1. Myth: All music will be free and supported by advertising in the future. There simply isn’t enough online ad revenue to go round.  In 2007 the entire European online ad market was exactly the same size as the entire European music market (€ 7.7 billion)
  2. Mistake: Charging the 1st generation of ad supported download services too much for their licenses  Qtrax and Spiral Frog clearly have their flaws but they were further impeded by excessively high rights fees. Ad supported rates need to sit somewhere between radio and premium download rate levels, skewed strongly to the former.
  3. Misconception: Spiral Frog and Qtrax flopped, Ad Supported is dead. A) first movers rarely win, early followers typically do, so wait for the next breed B) where downloads have stumbled streaming has flourished cf MySpace in the US, Last.FM, imeem
  4. Misconception: Ad supported downloads will cannibalize premium downloads pt1.  Users of ad supported download services tolerate restriction on use, sound quality, catalogue etc. in return for no fee.  Most of those willing to pay do so because they want the quality etc.  Otherwise they’d file share. 
  5. Misconception: Ad supported downloads will cannibalize premium downloads pt2. Apple owns 80% of the premium download market.  Ad supported download services aren’t compatible with iPods.  
  6. Misconception: Ad supported streaming weakens the premium download market. Last.FM, imeem etc are entirely complementary to premium downloads, indeed one could argue they have a symbiotic relationship with premium downloads
  7. Mistake: Trying to charge for streaming music. Ad supported streaming does though, destroy the market for premium streaming services such as Napster and Rhapsody.  These services need a fundamental rethink e.g. 100% DRM-free for an upfront annual fee.
  8. Mistake: Excessive restrictions on number of plays per artist per hour etc. DMCA restrictions on ad supported streaming confuse online with traditional radio are ignorant of the fact that online is an on-demand medium.  Ultimately the playground should level so that there is one broad category of on demand streaming alongside pure simulcast radio
  9. Myth: Consumers won’t buy music anymore if they listen to ad supported streaming. The social music services actually drive music discovery and purchase.  Last.FM has strong affiliate relationships with iTunes etc
  10. Myth: Apple will launch an ad supported streaming service integrated into iTunes and iPhone and iPod touch, using Genius to drive Audio Scrobbler-type functionality. This is one myth I hope comes true J