Apple Music And The Listener-to-Buyer Ratio

The next 6 to 12 months could prove to be some of the most disruptive record labels have ever experienced, and nowhere will this pain be felt more than among smaller independent record labels with strong digital sales.   At the heart of this disruption will be Apple Music and the wider continued ramping up of streaming. If Apple Music is a success over the coming year it will do one or both of the following:

1. It will convert / cannibalize non-subscribing download buyers
2. It will convert / cannibalize existing subscribers

The probability is that it will do a bit of both with an emphasis on #1. The market level net impact of #1 will depend on the degree to which Apple converts lower spending iTunes buyers versus higher spending ones i.e. whether it increases or lowers the average spend.   But even if it is the latter the effect for smaller labels could still be net negative over the coming year. If you are a big label with hundreds of thousands or millions of tracks then you have enough catalogue to quickly feel major revenue uplift from 5 or 10 million new subscribers. If you only have a few hundred or a few thousand tracks though then the picture is less rosy.

The Listener-to-Buyer Ratio

At the core is the listener-to-buyer ratio i.e. how many new listeners you get for each ‘lost’ buyer. Let’s say that for every download sale lost due to an iTunes customer becoming an Apple Music subscriber transforms into 10 listens by 3 people within 12 months. So 30 streams instead of one download. The listener-to-buyer ratio here is 3:1. A generous assumption perhaps but let’s work with it. Against a base of $25,000 of download revenue that would translate into $6,250 less download revenue and $2,365 more streaming revenue. So a net loss of $3,885, a 16% decline.

If we reduce the average plays to 5 per user the revenue decline becomes 20%. In order for the revenue impact to be neutral the total new streams would have to be 80, which with a listener-to-buyer ratio of 3:1 would require each person to stream the track 27 times. Or alternatively a 8:1 listener-to-buyer ratio with 10 plays per user would also deliver no change in revenue. A great track could feasibly have an average of 27 plays per user per year, a good track could have 10. But an average track is going to be below both. So realistically, more than an 8:1 ratio is going to be required.

Scale Looks Different Depending On Where You Are Sat

What quickly becomes apparent is that the most viable route to ensuring Apple Music streaming revenue offsets the impact of lost iTunes sales revenue is as big an installed base of streaming users as possible. The more Apple Music users there are, the more likely more of them will find and listen to your music. This is why the scale argument so is so important for streaming and also why small labels feel the effect less quickly. If you have a vast catalogue you don’t need to worry too much about the listener-to-buyer ratio because you have so many tracks that you are a much bigger target to hit. The laws of probability mean that most users are going to listen to some of your catalogue.

Let’s say you are a big major with 1 million tracks out of the 5 million tracks that get played to any meaningful degree in streaming services. That gives you a 20% market share. But if you are an independent with 50,000 tracks that gives you 1%, 20 times less than the major. Which means that you are 20 times less likely to have your music listened to. And that is without even considering the biases that work in favour of the majors such as dominating charts and playlists, and other key discovery points. So in effect the major record label in this example could be 30 to 40 times more likely to have its music listened to. Which is why the listener-to-buyer ratio is unlikely to keep the major label’s exec up at night but could be the difference between sinking or swimming for the independent.

In all probability Apple Music will make streaming revenue a truly meaningful income stream for all record labels but in the near to mid term big record labels are likely to see a very different picture than the smaller independents.

Apple Music: A Platform Play With Hidden Nuance

Today Apple finally announced its long, long anticipated entry into the streaming music space with Apple Music. Apple has spent the last few years as the sleeping giant of streaming music watching Spotify et al seize the innovation mantle and dominate both consumer behaviour and the industry narrative. With all the anticipation expectations were understandably high, too high perhaps. Thus in many respects Apple Music underwhelmed (a 9.99 on demand service;  a 24/7 live broadcast radio offering Beats1; a fan / artist engagement platform Artist Connect). But there is also more than first meets the eye, there is a nuanced strategy at play.

Radio Takes Centre Stage

Placing radio centre stage is smart, as that’s how Apple will engage the early follower consumer, who will be Apple’s core target (other than winning back some existing Spotify users). Remember, Apple’s core priority is delivering the best possible music experience to as many of its device owners as possible. A 9.99 subscription service that works for 10% of them is much less interesting than a free radio service that works for 500 million of them.

There’s no little irony that Apple triggered an industry knee jerk reaction against free music only to go and put free music at the core of its streaming play. Of course the crucial difference here is that the free music is not on demand. Apple is using radio, real time broadcast and high profile DJs as a way of bringing context and meaning to internet radio for the Apple mainstream (which of course is slightly different from the broader mainstream). Whether Beats1 is enough on its own for that purpose is another question.  Beats2 and 3 to follow shortly?

Taking The First Step Towards A Platform Play?

Apple continues to be ridiculed for its failed Ping! music social network. While it was no killer app it nonetheless represented an attempt to turn iTunes into a music platform. Now that same strategy has been rekindled with the launch of Artist Connect. This is Apple’s attempt to turn itself into an artist-fan engagement platform. Artist-fan engagement is the gold dust of the digital era music business. It’s the scarce, invaluable commodity that music fans crave in a post-scarcity music world. The non-music content is also interesting. Artists can push photos, videos and works in progress to their fans. This combines elements of the D.I.S.C. music format I wrote about here and also the Agile Music concept I wrote about in 2011. There is no reason why music should be a creative full stop in the digital era nor why the static audio file should be the be all and end all. Music fans want more than just the song.

There’s no shortage of competition in this space but while DIY sites of various guises are niche, Apple presents the opportunity to reach more than a hundred million of the world’s most valuable (i.e. highest spending) music fans. Sure some of them now pay for Spotify but they’re still iTunes users also.  If Apple’s featureset for artist is strong enough, expect strong uptake, especially from the bigger labels and artists.

Apple Is Making A Play For A Bigger Role Than Ever In Music

The long term implications are intriguing. If Apple establishes itself as one of the key engagement platforms it will change some of the core dynamics of music marketing. All the while strengthening its hand and establishing an indispensable role for itself if it doesn’t make meaningful inroads into the subscription market. Consider it a back up plan. But even more interestingly, if it succeeds at both subscriptions and marketing then it suddenly has more power than it ever did in the hey day of the iTunes Store. Apple could emerge with the power to break and then make an artist. Once it gets there record labels will rightly start casting nervous glances over their shoulders.

Why Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

BBC Radio One DJ Zane Lowe just announced a shock move to Apple. For the non-Brits and non-Anglophiles Zane Lowe is arguably the most influential radio DJ in the UK and is renowned for being a tastemaker with an eclectic pallet. His left of centre focus and his commitment to supporting and breaking new acts has allowed Radio One the freedom to be unashamedly mainstream in much of its other output. So why does this all matter for Apple? While it is not yet clear what sort of role Lowe will assume at Cupertino it is a move bristling with significance and a clear statement of intent from Apple.

Fixing the Tryanny Of Choice

The Tyranny of Choice remains one of the biggest challenges for streaming services, namely how to make sense of 35 million songs. It has been challenge enough for the Aficionados at the vanguard of the first wave of subscription service adoption. It is a problem of far greater proportions for the next wave of subscribers, the later adopters who do not have the expertise nor intent to invest great effort into discovering new music. It is not as simple as ‘lean forward’ versus ‘lean back’. But instead gradations between the two. Beyond Apple’s inevitable Spotify-subscriber win back efforts, these early followers will be at the core of Apple’s streaming strategy.

The 6^th Of March: Man Versus Machine

Spotify showed its own music discovery statement of intent when it acquired the Echo Nest on the 6^th of March 2014. Zane Lowe’s final Radio One show will broadcast on the 5^th of March 2015, leaving him free to join Apple on the 6^th of March 2015, yes, 1 year to the day after the Echo Nest. Coincidence? Perhaps. Either way, the symmetry of Spotify making its bet on algorithmic curation and Apple making its bet on human curation is unavoidable. It is man versus machine, with Apple for once coming down on the side of flesh and blood over technology.

However expensive Lowe’s salary might be, it will be far short of the millions Spotify paid for the Echo Nest, which had burned through $25.6 million of investment to get to that point. Yet there is every chance that Lowe, used properly, could deliver more value to Apple’s music discovery than the Echo Nest can to Spotify. Don’t get me wrong, the Echo Nest is a fantastic outfit with some of the smartest music analytics people going. Along with Pandora’s Music Genome Project the Echo Nest is as good as it gets for music discovery algorithms. In fact when it comes to implementation and cool data driven projects, the Echo Nest leads the way. But there is a limit to how far algorithms can fix the problems posed by the Tyranny of Choice.

Filter Bubbles

As Eli Pariser identified in his excellent Ted Talk ‘Beware Of Filter Bubbles’ there is a risk that recommendation algorithms actually narrow our choice and limit discovery. That by continually refining recommendations based on previous taste and choice they make our world views increasingly narrow and ultimately boring. Music discovery is not simply about finding music that sounds like other music we already like. It is also about serendipitous moments of wonder when something comes at us from the left field and leaves us breathless. That is the antithesis of ‘here are three other bands like this you might like’.

Of course it would be unfair to suggest that the Echo Nest is not sophisticated enough to engineer serendipity and surprise into its discovery system. (And Spotify is beginning to double down on human curation too). But the ability of a stack of code to perform this task versus an expert tastemaker is significantly less. And, another ‘of course’, it is impossible to definitively prove this one way or the other because ultimately the results are subjective and not properly measureable. Because one person’s awesome discovery is another’s sonic tripe. But that is entirely the point of the whole debate.

People Don’t Want Discovery, Well They Don’t Think They Do

There is a fundamental problem with algorithmic discovery: people don’t want it. In numerous consumer surveys I have fielded for numerous clients, respondents show little or no interest in discovery or recommendation features. Yet in the same surveys the vast majority of them state that they regularly listen to music radio, which is of course recommendation and discovery. The big difference is that it doesn’t feel like it. Instead it is an inherent part of the DNA radio. It is not an awkward artificial appendage that most people just don’t get.

Earned Trust

During his Monday – Thursday 2 hour show Lowe will play 20 to 30 or so tracks. Listeners know and understand that these are the tiny tip of the iceberg he has sifted through that week, that these are the songs he has decided are the ones that need to be heard. And when he announces his ‘hottest record in the world’ they know it is probably going to be something pretty special, even if they might not actually like it. His audience appreciates him that way because he earned their trust over weeks, months and years. That is the asset Apple are buying. Even if he has to earn that trust all over again with a new audience, that is the model.

If Lowe was simply to push 20 to 30 songs a day to Apple users (whether that be on a radio show on iTunes Radio, as an iTunes podcast or as an iTunes playlist, or all of the above) the odds are in favour of some or most of those resonating with a large swathe of the target audience. Even if just one track blows away just a quarter of the audience each day, the impact of one fantastic discovery will have more impact than a torrent of ‘sounds a bit like’ recommendations.

30% Not 80%

An Amazon Prime executive recently said that when commissioning shows he didn’t want hits that 80% of his audience quite liked, he wanted shows that 30% of his audience loved. That is what discovery is all about. Not being content most of the time, but being blown away some of the time.   Zane Lowe is not going to solve Apple’s discovery problem all by himself, but the hire shows that Apple is putting its money on moments of human magic being the nitrous oxide in its music discovery engine.

10 Thoughts On YouTube Music Key

Google just announced its long anticipated YouTube Music Key. You can find out all you need to know about its potential impact on the wider market in MIDiA’s report ‘Unlocking YouTube: How YouTube Will Change Music Subscriptions’. Here are 10 further thoughts:

1. Identity crisis: We are at a crucial juncture in YouTube’s life. As I wrote last week, artists and labels have a conflicted view of YouTube. 10 million streams on YouTube is a marketing success but 10 million Spotify streams are lost sales. So following that logic does that mean 10 million Music Key free streams are better than 10 million Music Key paid streams?! Either way it will force the industry to reconsider its views on YouTube as a marketing vs a consumption channel. Streaming in order to buy was a model with clear outcomes. Streaming in order to stream is not. Music Key will act as a catalyst for the broader narrative of reassessing YouTube’s music industry role now that the end destination is increasingly streaming itself.
2. YouTube just got a fantastic upgrade to its free tier: As part of the deal for the paid tier YouTube got new discovery features and full album streaming. Full album streams on YouTube have always been a contentious issue, now they are there officially. This small but crucial product feature transforms YouTube free from a discovery service to a fully-fledged destination.
3. Two services for the price of one: YouTube Music Key and Google Play Music All Access are for now bundled together but ultimately there is little sense in keeping them both. Just as Ian Rogers is busy trying to integrate iTunes Radio and Beats into a single value proposition, so some one will have to do the same at Google. Let’s just hope the result isn’t a service called Google’s YouTube Play Music Key All Access…
4. Is 7.99 the new 9.99?: Last month I suggested that the main subscription price point of 9.99 should come down to 7.99. Music Key will be priced at 7.99 for an indeterminate period to its first wave of users. Expect Google to use this as a test case for 7.99 as the permanent price point.   And if it works, expect other services to get the same deal.
5. Spotify competition: 1 year from now Spotify will still be the leading subscription service but it will be facing fierce competition from YouTube and from Apple. It will also most likely have lost a bunch of subscribers to both. Just as Apple stole Amazon’s music buyers and then Spotify stole them from Apple, expect YouTube and Apple to steal (and steal back) a number of them. Also, neither Apple nor Spotify have video, yet. So with the same catalogue and similar pricing they need something else to differentiate. For now Music Key has the differentiation upper hand.
6. Vevo competition: Music Key’s core addressable market is super engaged YouTube and Vevo music fans. 15% of Vevo music consumers accounts for in the region of 67% of its music ad revenue. If Music Key converts even half of those users to Music Key, it will leave a gaping hole in Vevo’s ad revenue
7. Windowing: Taylor Swift has taken the windowing debate to a new level, adding further weight to the argument that free tiers should be treated as a separate window from paid. Google made it clear at the launch of Music Key that a song is on free and paid, not one or the other. While a growing number of artists would willingly sacrifice being on both tiers of Spotify how many would risk not being on YouTube?
8. Rippers: 12% of consumers and 25% of under 25’s use YouTube rippers like iMusic Tubee Free which effectively do what Music Key does (remove ads, offline caching, playlists etc.). These sorts of apps are of course readily available from the Google Play Store. If Google is serious about Music Key being success they will need to crack down hard on these apps.
9. What does success look like?: YouTube has 1 billion monthly users and about 140 million weekly music video users. That’s a massive audience to covert from, approximately three times bigger than Spotify’s monthly user base. Given that YouTube already sucks so much revenue potential out of the subscription space (25% of all consumers say they don’t pay for subscriptions because they get all their music for free from YouTube) YouTube’s measure of success needs to be much higher than any other music service. 6 million or so subscribers in year one would be a good start.
10. Too little innovation, for now: If YouTube can harness all of its unique assets it can create the best music subscription service on the planet. Music Key isn’t yet anywhere near that but it is only a beta product, so expect YouTube to up its innovation game and put further blue water between it and the rest.

Apple, Beats and Streaming’s Mutual Fear Factor

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, 3^rd 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 3^rd 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 3^rd 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 3^rd 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.

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.

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.

iTunes Radio: Another Chapter in Apple’s Cautious Cloud Music Strategy

As expected Apple today announced the launch of the music industry’s worst kept secret iTunes Radio, a Pandora-like personalized radio service.  iTunes Radio is integrated into the new iOS7, is free with ads to all, free without ads to Tunes Match subscribers. There’s enough different and new in iTunes Radio to make it stand out from the pack and to ensure it has a typically high quality Apple touch.  But the prevailing narrative will be that Apple has taken the conservative me-too strategic option rather than bringing new transformative innovation to the marketplace.  In many respects that analysis rings true but the complete picture is far more nuanced.

Apple is not in the business of creating markets or being a first mover.  Apple is the archetypal early-follower.  That applies even more to digital music than to hardware for Apple.  The iTunes Music Store was far from the first download store, but it was, and arguably still is, the best.  Apple is in the business of selling hardware and its music strategy is dictated by its ability to help it sell hardware.  Rather than balance itself precariously on the bleeding edge of digital music innovation Apple waits for music technology to become ready for prime time.

Two Reasons Why Apple Has to Go Slow With the Cloud

All of that has rung true for a decade+ at Apple.  But now there are new factors in the mix which play determining roles in Apple’s music strategy:

• Apple has become a mainstream company: Apple’s nineties and noughties heritage was that of the early adopter tech aficionado.  Now Apple is a mainstream consumer product company.  Since the start of 2011 Apple has sold 468 million iPods and iPads. In doing so it has brought swathes of mass market consumers into the iTunes ecosystem, resulting in 575 million credit card linked iTunes accounts.  But all this means that Apple now has to move more carefully, innovating at a pace that is appropriate for a majority of its customer base not just the highly engaged top end.  Spotify’s 6 million paying subscribers is a fantastic achievement but pales compared to Apple’s iTunes user count. The simple fact is that Apple does not think that $9.99 subscriptions are yet ready for primetime for mainstream consumers.
• The shift to the cloud will impact device pricing strategy: currently Apple’s device pricing strategy is dictated by storage capacity.  The bigger the hard drive the higher the price. But once/if everything shifts to the cloud bigger memory capacities matter much less.  This is why Apple has to go slow with the cloud.  If it goes too quickly it could accelerate the transition at a rate it cannot manage and end up wreaking havoc in its core device business all for the sake of keeping digital music fans happy.  A personalized radio service is a neat complement to downloads.  It won’t win any awards for innovation but it will give mainstream Apple customers enough extra value without disrupting device sales, or indeed music sales.  iTunes Radio buys Apple crucial time as it plans its cloud-era device and pricing strategy.

What Apple Could (and Should) Do

The shift to the cloud is of course inevitable and for all that iTunes Radio may buy Apple some time, the challenges must be faced. The answer to Apple’s problems may lie in the problem itself.  If consumers increasingly shy away from higher memory devices – and therefore more expensive devices – content may prove to be the way in which Apple maintains premium price points across its device portfolio.

Content is the core reason people use iPads and iPods and one of the core reasons people use iPhones.  A smart move would be to take that importance and bake it into the value proposition.  Instead of charging a premium based on memory size alone, Apple could additional sell content-device bundles (and longer term phase out memory size pricing entirely).  For example pricing tiers for iPads could look something like this:

• Price point 1: 16GB, no content
• Price point 2: 32GB $/€/£10 a month of iTunes content
• Price point 3: 32GB $/€/£10 a month of iTunes content and on demand music streaming

The reputation of content-device bundles got somewhat tarnished by the Comes With Music experience, but the model remains fundamentally sound.  Apple could just be the company to make it work. If it does, iTunes Radio will have proved to be a crucial first step on that journey.

In the meantime iTunes Radio is another important, incremental step in Apple’s cautious cloud music strategy.  Cautious because Apple is intent on innovating at a pace that matches the appetite of its mainstream customers.  Cautious because a hasty move could turn iTunes Music sales upside down with direct cannibalisation. And most importantly of all, cautious because Apple knows that if it gets it wrong it could disrupt device pricing strategy, with major repercussions right across Apple’s business.

In short there are many reasons for Apple to go slow with its cloud music strategy.  That might not make for the most exciting of music product roadmaps, but it does mean that Apple is building for long term sustainability and viability.  That in itself is of crucial importance for the music industry and should help ensure Apple remains a music industry partner of true scale for years to come.