Apple Music: The Money, The Launch Hiccups, and the Nitty Gritty Details

Alongside the launch of iOS 8.4 on Tuesday Apple, Inc. (AAPL) made its long anticipated entrance into the premium streaming music market, but the launch was not without some hiccups.  (The service had been announced earlier in June at Apple’s press event.)

I. This Market is On Fire

Only a 2 million customer market as recently as 2012, the paid subscription movement in the digital music space follow the explosion of interest in free web radio, a movement trailblazed by the likes of Pandora, Inc. (P).  Last year Nielsen’s market research indicated that streaming services accounted for roughly 3 percent of the $109B USD worldwide market.  That’s a small stake, but a significant one, at roughly $3.3B USD.

[Image Source: DigitalMusicNews]
The U.S. and Europe have both seen an explosion in paid music streaming subscriptions over the past two years, as customers grow more familiar with the billing scheme.  The paid service model jives with with customers’ needs — the desire for on-demand, on-the-go content.

[Image Source: The Wall Street Journal]
Today streaming services — both free and paid — have largely inherited the role satellite radio once held.  Even direct downloads are feeling the effect, with the market share of Apple’s iTunes declining gradually in recent years.

Pandora remains the most dominant player in streaming music in terms of shear user headcounts, with around 80 million active users, of which roughly 3 million (less than 5 percent) are paid subscribers [source].  Pandora’s library also is also tiny compared to its subscription-heavy foes, with around 1.5 million tracks.

Graphs show the state of the streaming music market in 2014. [Image Source: Statista et al.]
By contrast Spotify has slightly less listeners — 75M (which may not all be active) — but 20 million of users (roughly a quarter) are paid subscribers.  Part of what makes a premium streamer tick is an oversized library.  With “over 30 million” tracks, Spotify has roughly 20 songs for every one on Pandora.

Other subscription-heavy players in this space include Swedish startup Rdio (85 countries; 32m+ tracks; unknown subscriber total), France’s freemium service Deezer (180 countries; 5m paid subscribers; 15M monthly users; 35m tracks), Seattle, Wash.-based veteran Rhapsody+Napster (~2.5M paid subscribers; 32m tracks), Microsoft Corp.’s (MSFT) Xbox Music ($8 USD/month; subscriber count not available), and Jay Z’s overpriced streaming susbscription service Tidal (which at $19.99 USD for a “premium” subscription is among the priciest in the business).

The state of the music market in 2014, according to the NPD Group.
Apple previously dabbled in the streaming space with the 2013 release of iTunes Radio in 2013, a free ad-supported service.  Apple was content for a while to forgo a premium subscription service, as in many ways its iTunes direct download business offered an analogous solution that was a dominant market force that Apple was wary of disrupting.

Ultimately, though Apple’s hand was forced not only by the success of Spotify, but by its arch-rival Google Inc. (GOOG).  Google had launched a cloud music storage locker dubbed “Google Play Music” in 2012.  In 2013 it took the fight to iTunes by tacking on an on-demand subscription service, dubbed “All Access”.

By the looks of it, Google may have somewhere in the 5-10 million paid subscriber range, based on survey/market share data (although a direct subscriber head count was not immediately available).  Its library has grown to encompass over 30 million tracks.

II. Cash Rules Every Around Me (Apple)

So where does Apple’s new service fit in?

In many ways its similar to Google Play All Access.  Like All Access, it will come with a free trial.  But Apple ups the ante by making the trial last 3 months, versus 30-days with Google.  Beware, though, at the end of the 3 months, unless you opt out, you’ll be automatically enrolled in the paid subscription (and billed).

Much of the media coverage surrounding Apple Music, focused on the interesting rant opinion about the service published by pop musician Taylor Swift on her Tumblr.  In her post To Apple, Love Taylor the mercurial blonde, remarked:

We don’t ask you for free iPhones.  Please don’t ask us to provide you with our music for no compensation.

Swift threatened to pull her new album 1989 from Apple’ service if she wasn’t compensated for plays from users w/ a free trial.  

Apple’s plan originally called for no payments to artists during the free trial period; payments would come only from subscribers.  However, the unpopular nature of that proposal was not the sole cause of Swift’s outburst.  This is only the latest episode Swift’s battle against free streaming which largely began last year with her penning an impassioned editorial in The Wall Street Journal.

Taylor Swift humbled Apple Music, after she forced it to promise her payment.
However, losing Swift would be a costly blow to Apple’s nascent streaming service.  Apple recognized she was serious after watching her make good on her similar threat against Spotify.  Apple Internet Services and Software senior vice president (SVP) Eddy Cue (who oversees iTunes and Apple Music) hence acted quickly to avoid a similar fate as Spotify.  He wrote on Twitter:

Thus the great Apple-Swift spat was settled, albeit leaving some questions in its wake.

Controversy aside, Apple Music’s main advantage over the competition is similar to Google’s — tight integration on a top mobile platform.  Otherwise Apple is basically in line with the competition with a $9.99 USD/month individual subscription fee ($120 USD/year) — a price identical to Google’s, Spotify’s, and most other top rivals.

Apple does mix things up somewhat with a $14.99 USD/month ($180 USD/year) “family” subscription plan, good for up to six family members.  Even with the price break for the family subscription, Apple should stand to cash in on Apple Music subscribers.

Versus royalties that can amount to mere pennies per track, subscription business models can be orders of magnitude more profitable, depending on how frequently the customer listens.  Today the average U.S. consumer who pays for music spends only $52 USD according to comments by Russ Crupnick of MusicWatch to the WSJ.  That’s nearly half the $80 USD ($112 USD in 2014 dollars) they spent back in 1999.

Apple fares a bit better than most, but only 25 percent of its iTunes users spend $110 USD or more per year on music.  For the remaining three quarters, a subscription would almost certainly amount to an increase in profits for Apple.

Apple Music should be more lucrative, per user, than iTunes. [Image Source: Ars Technica]
One selling point to tempt customers to bite is the ability to upload and “iTunes Match” 25k tracks (even pirated ones), which will give you a cloud-hosted equivalent to play on demand.  SVP Cue announced that total would jump to 100K with the launch of iOS 9 in a couple months.

(iTunes match is also available as a standalone service for $24.99 USD/year.)

If Apple makes good one its 100k promise for iOS 9, it will be offering twice the cloud storage as Google.  At present Google allows you to upload 50,000 tracks to your cloud locker.  Play All Access, though, has the extra perk of also giving you a free subscription to Music Key, YouTube’s streaming music offering (which goes for $8 USD/month on its own).

III. Track Quality and the Rocky Service Start

That — and the family plan — are the good news.  The not-so-good news is that Apple at present has no plans to offer 320 kbps tracks.  

Apple will initially stream tracks to subscribers using the Advanced Audio Coding (AAC) codec format.  Like Microsoft’s Xbox Music service, sound quality will be limited to 256 kbps.  By contrast Pandora also uses AAC, but offers users up to 320 kbps of sound quality.  Likewise Deezer, Google Play, and Spotify offer users MP3s at 320 kbps (and Spotify also offers 320 kbps tracks in the Ogg Vorbis format, a prefered format among audio purists).  Tidal and Rdio even offer paid suscribers incredible quality 1,411 kbps FLAC tracks.

Apple Music lacks the bitrates of many of its rivals, meaning sound quality may be a bit worse to the trained ear.
In terms of sound quality Apple Music isn’t horrible, but it’s definitely near the back of the pack.  Add in the lack of the kind of true cross platform support found with Spotfy or Google Play and Apple’s equation becomes a tougher sell.

Also the service has seen some early struggles today, with some users reporting their Apple Music app unable to access the iCloud Music Library (the iTunes library that’s supposed to stream into the app).

Some users reportedly fixed this problem by rebooting, but persistent access problems remain for others.  Problems with offline access to playlists and other features also were reported by some early users.

Apple has not officially commented on these issues.  All things said, though, such problems are not that unusual for a rollout of a major cloud content service.

For iOS users who want to opt out in iTunes on a Mac or PC click “Account Icon” (head next to search box) > “Settings” > “Subscriptions” > “Manage” > “Apple Music: Edit” > “Off”.  Alternatively, you can disable the renewal a bit quicker on the iOS device itself by “Apple Music” (launch app) > “Account” (upper left corner) > “Manage” > “Your Membership” > (uncheck renewal checkbox).

Apple is entering the music business at a crowded time.  Besides the heavy hitters of the free, freemium, and premium market, there’s also the challenge of dealing with rivals that operate on far different business models such as, Inc.’s (AMZN) free “Prime Music” streaming service for Prime subscribers.

Challenges aside, given its massive global userbase of iPhone and iPad users, it’s hard to imagine Apple Music not achieve a degree of success.  That may help Apple make up much or all of the ground iTunes has lost digital music market share-wise since 2012.

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