A report on CNBC suggests Apple Inc. (AAPL) is planning to make a Beats Music app part of the iOS installation starting in 2015.
Such a move would mean that every iPad, iPhone and iPod Touch running the latest version of AAPL’s mobile operating system would have that Beats app — whether users want it or not.
The move would give Apple’s recently acquired streaming music service prominent positioning, with an “eyeball” advantage over rivals like Spotify and Pandora (P).
Beats Music Solves Two Problems for AAPL
Apple frequently impresses with its bottom line. But as InvestorPlace Editor Jeff Reeves pointed out in his analysis of AAPL’s last quarterly earnings report, sluggish iPad sales pose a risk to AAPL stock holders.
Apple’s revenue is dominated by hardware sales. The top three products are the iPhone, iPad and Mac. That’s problem No. 1 — hardware sales are cyclical and there’s always the risk of a flop. With the days of charging for OSX and iOS upgrades and even its iWork productivity software in the past, Apple lacks ongoing revenue streams it can count on to help even out the lows when hardware sales dip.
Problem No. 2? The fourth largest source of revenue is iTunes/Software and Services, and the bulk of that is iTunes purchases — sales of movies, apps, books, software and especially music.
Unfortunately for AAPL, that iTunes revenue is under siege. The Wall Street Journal reports iTunes music sales are off 13% to 14% since the start of the year.
A subscription-based streaming music service not only fits nicely into that ongoing revenue stream model, it would also help take the sting out of those declining iTunes music sales.
Sounds like a great idea that would address both of these AAPL problems, but isn’t that what iTunes Radio was supposed to be?
More on that in a moment.
New Beats App Would Make Beats Music Impossible to Ignore
Apple still maintains tight control over the mobile experience of its customers, and that includes installing core AAPL apps on every iPhone, iPad and iPod Touch. If you own Apple mobile gear, you cannot remove these apps from your device.
As realtors say: “location, location, location.”
That prime location and the inability to delete them gives Apple’s apps great exposure and significantly increases the odds of their being used — if the app is always in your face and you don’t have to download or go looking for it, that’s a real advantage over the competition.
The company has used this strategy in the past, making Apple Maps a core app to combat rival Google (GOOG) and its popular Google Maps and then putting the iBooks app on every iOS device as it takes on Amazon (AMZN) in the e-book business.
If AAPL is looking to push its mobile users into signing up for the Beats Music subscription service, making that Beats app part of every iOS install is good way of doing it. Even if someone isn’t specifically looking for a music subscription service, clicking the Beats Music app accidentally or out of curiosity could lead to them signing up to try it out.
Why Beats Music? What Not Make iTunes Radio a Standalone App?
Apple could go the route of making iTunes Radio its standalone streaming music app. At the moment, iTunes Radio is part of the Music app — requiring users to go looking for it — and would undoubtedly see an uptick in subscribers with more prominent placement.
However, iTunes Radio hasn’t been the blockbuster Apple hoped. Rather than reboot the service, the company isn’t taking any chances. With other subscription streaming music services like Spotify and Pandora now past the point of being a nuisance and actively threatening AAPL’s iTunes revenue, the time is perfect to bring out the big guns: Beats Music.
There are better sounding headphones than Beats, often costing significantly less money. Regardless, Beats headphones have cred, they’ve become a status symbol and remain a top-seller. They are particularly appealing to younger, status and appearance-conscious consumers. Even those who don’t own Beats gear recognize the logo and associate it with a premium, hip listening experience.
That Beats brand cachet among music lovers is a primary reason Apple bought Beats Electronics. Sure, the headphone sales will help the bottom line, but the company also looks to be counting on Beats’ appeal to help AAPL dominate subscription streaming music the way iTunes has dominated music sales.
One problem with that plan — Beats Music isn’t all that popular. In May, Macworld reported that Beats Music had just 250,000 subscribers, a fraction of the 10 million-plus that Spotify had at the time. And that’s where we find the logic in Apple’s plan.
Plunking a Beats app on all iOS devices gets Beats Music the exposure it needs to take off.
Given Apple’s installed user base (the company says it has 800 million active iTunes accounts and as many iOS devices floating around), Beats’ popularity with music lovers and the expected Beats Music app’s primo spot on many of those iOS devices starting next year, look for Beats Music to be in position to be become a force in streaming music.
And look for AAPL to gain a valuable, ongoing revenue stream.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
