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Industry puts hope in Apple’s music service

More than a decade ago, the music industry was in crisis. Songs were being passed around the Internet illegally, and CD sales were in decline. So major labels and musicians embraced Apple, which convinced consumers to open their wallets again with iTunes.

Now again in turmoil, the music industry is looking once more to Apple, for it’s its new $10-a-month streaming service. The challenge this time: Find a solution for the industry as it struggles with free streaming sites threatening the core economics of its business.

With its paid service, Apple will go against the grain of the tech industry, which is seeing the quick growth of free models for music. Google, which has 1 billion music listeners through YouTube, introduced its own free streaming service last week. Pandora, the early streaming specialist, has 85 million listeners, and Spotify has doubled the number of its nonpaying users to 75 million in the past year.

The trends are a source of deep unease in the music industry, which is now trying to rely on advertising, rather than record sales, for its revenues.

“We are at an important inflection point of the evolution of music,” said Larry Miller, a professor of music business at New York University’s Steinhardt School. “After more than 15 years in digital music transition ... only Apple has the potential to push streaming – paid streaming – into mainstream adoption.”

Apple is coming relatively late to the scene, but the tech giant arrives as labels and musicians have been searching for an alternative to Spotify, the privately held streaming firm once championed by the music industry.

In months of negotiations with music labels and artists big and small, Apple committed a vast marketing budget for glitzy TV ads and direct marketing to the hundreds of millions of email accounts it holds. It promised slightly better royalties than Spotify and other streaming partners and perks for consumers that aren’t available on other streaming services, according to people familiar with the company’s plans.

But most important, Apple promised to strictly enforce its policy that users must pay after a free, three-month trial.

In this way, Apple will differ from Spotify and Pandora, which charge for premium tiers of service but allow users to stay on their free ad-supported programs. The free tiers don’t offer the same perks as the paid tiers, but for the vast majority of its users those benefits haven’t mattered enough to get them to upgrade for a monthly fee.

“Apple is generally positive for artists in getting better pay because subscriptions pay about seven times as much as free services do to artists,” said David Lowery, a member of the bands Cracker and Camper van Beethoven and a lecturer in music economics at the University of Georgia. Apple could become the strongest competition for Spotify, which has 20 million paying users and is by far the biggest streaming music provider.

“But we don’t want to create another monopoly where we end up like authors did with Amazon. What we want is more options,” Lowery said.

The stakes are just as high for Apple, which depends on music to keep customers buying new iPhones and other gadgets. In early 2014, music downloads on iTunes declined for the first time. Two-thirds of U.S. consumers, meanwhile, are listening to streaming music each week, according to Nielsen Entertainment research.

When Spotify first launched in the United States in 2011, the three major music labels – Universal, Sony and Warner – threw their support into the company and took equity in the privately held firm. Spotify chief executive Daniel Elk pitched the labels, saying most users would come first as free listeners but then become hooked and eager to pay $10 a month for the service’s premium tier, which is ad-free and gives users more control over what they hear.

In a May earnings call, Warner Music chief executive Stephen Cooper reiterated the importance of getting users to start paying. “We continue to believe that the long-term sustainability of the ‘freemium’ model is predicated on high levels of conversion from ad-supported ‘free’ to paid subscription,” Cooper said. “Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings.”

But in the last four years, Spotify has struggled to grow its paid service. Almost all new users started out with the fee plan, but only about 20 percent to 30 percent of them became paying customers, according to industry executives.

Privately, music labels began to express frustration. Spotify wasn’t putting enough money into marketing its premium service and didn’t collect credit card numbers of new users to ease the transition to the premium tier, executives said. They complained that Spotify appeared more interested in bulking up its user numbers to impress investors than generating revenues that could be passed down to labels, writers and musicians.

“The irony of it is that there is nothing more that we wanted than to make Spotify a significant player, but what happened was that Spotify revealed its true colors – that it is no different than any Silicon Valley company that wants to build a whole business on audience and not subscribers,” said a music industry executive who spoke on the condition of anonymity because of ongoing relationships with streaming providers.

Earlier this month, Taylor Swift complained that Apple wasn’t paying artists for their music during the new service’s three-month free trial period. Apple quickly agreed to reverse its policy.