Apple (AAPL) is making news for an Apple music service that doesn’t yet exist. The company is expected to re-launch Beats Music — either as standalone streaming service or as part of iTunes — at its June World Wide Developer’s Conference.
What’s making news isn’t the launch itself, it’s the heavy-handed tactics AAPL appears to be using with record labels. Reports have Apple pressuring the labels to prevent competing services like Spotify, Pandora (P) and Google’s (GOOG, GOOGL) YouTube from offering listeners the option of free, ad-supported streaming music.
Potential Outcomes of Aggressive Apple Music Negotiation Tactics
Apple has been down a similar path in the past when it decided to take on Amazon (AMZN) with its iBooks digital bookstore. AAPL became embroiled in an e-book price-fixing antitrust investigation after colluding with publishers to fix e-book prices. Losing that court battle not only resulted in a public black eye for the company, it’s led to ongoing government scrutiny of other products, including Siri, Apple Maps and even hardware.
With the FTC becoming involved in the Apple music talks, there’s real risk that AAPL could find itself mired in another investigation, one that could expand beyond iTunes and Beats Music.
Apple is also reportedly involved in other media negotiations, hoping to secure TV programming packages for its Apple TV streaming box. TV is a big business in the U.S. (Adweek pegs its value at $74 billion annually, plus $3.5 billion for streaming TV content) and AAPL would love to capture a chunk of that. And playing the bully with record label negotiations is not likely to help Apple’s relationship with TV industry players.
Then there are the music fans. They don’t like to lose options. Many of them are students and they are willing to put up with ads to listen to free music. Out of a current 60 million subscribers for Spotify, only 15 million actually pay for the service.
If AAPL is successful in having record labels turn off the free music streaming spigot for competing services like Spotify, any Apple music service — even if it has the cool factor of Beats Music — is going to be seen as the bad guy. Apple risks having disgruntled music fans reject its streaming music service, trash it in social media and even turn their backs on other Apple products like the iPhone.
Apple has gotten a lot of mileage out of being the “cool” company with the hippest gear. If the company is seen to be a bully that uses its influence to stomp out competition, its image will suffer. And that could hit AAPL where it hurts –hardware sales.
Streaming Music: The Size of the Prize
According to CNET, RIAA numbers show U.S. streaming music sales in 2014 amounted to $1.87 billion, less than the $2.58 billion collected from Apple music sales through iTunes.
The entire U.S. music industry revenue for the year (not counting music publishing revenue) amounted to roughly $7 billion — that includes streaming, digital and physical music sales.
Even in a theoretical future scenario where all music is streaming only, that $7 billion total prize represents just 3.8% of Apple’s $182.8 billion in revenue for 2014.
Apple Music Negotiation Tactics Are High Risk, Low Gain
AAPL is seeing iTunes revenue shrink yearly, with the majority of those dollars being redirected to streaming music services like Spotify. It makes sense for AAPL to try to retain and/or recapture as much of that Apple music revenue as possible, and with Beats Music and iTunes, it has the pieces in place to be a top-tier streaming music player.
But why play the bully?
In doing so, Apple risks increasing regulatory scrutiny, turning off some of the music fans it’s courting, poisoning negotiations in the far-larger TV streaming market, and perhaps even alienating some of its loyal hardware customers?
That’s an awful lot to risk for that $7 billion.
Especially when you consider that without playing the bully, AAPL could leverage iTunes and Beats Music to capture a good chunk of that $7 billion anyway. Not all of it, but there’s no reason to believe Apple’s music services wouldn’t remain dominant anyway. So now AAPL is using heavy-handed tactics for what may ultimately be a few billion dollars, or just a percentage point or two of its annual revenue.
And that’s assuming the entire music industry revenue eventually goes to streaming…
But Wait, Spotify is Offering a 97% Discount, Isn’t That Also Playing Unfair?
With Beats Music nearing launch, Spotify is offering new users three months of its premium service for just 99 cents instead of the usual $9.99 month. That’s pretty aggressive.
But it’s also accepted practice. Stores and services have sales all the time.
There’s a big difference between discounting your service to bump up subscribers and leaning on record labels to try to have them cripple a rival’s operation. There’s also a David and Goliath aspect to this story, wherein Spotify is seen as the feisty underdog going up against the arrogant and mighty Apple.
A lot of people inevitably cheer for the underdog.
The streaming music market is a valuable one, but it’s small potatoes in terms of overall revenue for a company like AAPL. Especially when it could easily capture a good chunk of that simply by re-launching Beats Music and competing on an even footing with the likes of Spotify. By choosing to take a bully approach with its new streaming Apple music service, the company risks turning this product launch into a needlessly costly and protracted battle.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.