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Apple streaming service leaves iTunes behind

6 June 2015|Financial Times | Tim Bradshaw in San Francisco and Matthew Garrahan in New York

When Apple unveils a new music streaming service at the Worldwide Developers Conference on Monday, it will largely leave behind its 15-year-old iTunes brand.

The company's competitor to streaming pioneers such as Spotify and Pandora, the radio service, will simply be called Apple Music.

Co-founder Steve Jobs described iTunes as the earliest manifestation of the "intersection of technology and the liberal arts". But from now on, it will remain only as the name of the old download store.

The launch of an all-encompassing brand at the company's biggest event for developers speaks to the scale of Apple's ambition and the importance to the music industry of its latest venture.

As both physical formats and iTunes-style downloads decline, some artists fret that "all-you-can-eat" subscription services, costing $10 a month, cannot make up the shortfall.

With hundreds of millions of iPhone customers, each of whom is just a couple of taps away from signing up to the new service, Apple might be the music industry's best hope for sustainable growth. Apple Music is expected to come pre-installed when iPhone owners upgrade to the latest operating system.

But the objectives of the technology group and its partners are not perfectly aligned. While record labels and artists are looking for a financial saviour, Apple's priority is to use content to sell hardware. "It doesn't have to make money out of streaming," says Mark Mulligan, an analyst with MIDia Research. Even a wildly successful music service making billions of dollars a year will pale in comparison with the iPhone, which brings in tens of billions every quarter.

Analysts at Piper Jaffray estimate that if Apple matched Spotify's 15m subscribers, it would add less than 1 per cent to next year's forecast revenues for the company. That would mark a big change from the days of the iPod and iTunes, when portable music players galvanised a recovery at the once-struggling computer maker.

Apple hopes to glean some of the cool factor from artists such as Dr Dre, who alongside co-founder Jimmy Iovine sold his Beats Electronics business to the iPhone maker last year, and Taylor Swift, who famously pulled her collection from Spotify in a row over royalties.

"What counts as serious money to Apple has rather shifted over the years, but that doesn't mean music isn't important," says Dan Cryan, digital media analyst at IHS. "The whole brand is quite tied into music, because of the long legacy of the iPod, and within the company it seems to have a certain resonance."

Apple has been working on the streaming service since it acquired Beats last year for $3bn and will retain elements of the headphones company's app, according to people familiar with its plans. One of the features that will be retained is designed to elicit as much information as possible about a user's individual music tastes by asking them to select favourite genres and musical styles when signing up for the service. It is hoped that this personalisation, alongside recommendations from artists, will help overcome the difficulty in choosing what to listen to from a library of millions of tracks - something Spotify has struggled to achieve.

Apple will have a several inbuilt advantages over other players in streaming, says Mr Mulligan. "You could even call them unfair advantages," he says. "It owns the platform and streaming system . . . it could spend many multiples of what Spotify has been spending [on music licensing] and not dent its reserves."

Spotify has not idled as this competitive threat approached. It unveiled a revamped version of its app last month, which incorporates video clips as well as new ways to discover music.

Competing on technology and features will be important because both Apple and Spotify will have the same $10 monthly price. Apple had explored a monthly subscription fee of $8 but at least one of the big music labels objected to a lower price, fearing it would lead to price cuts across the nascent industry and undermine the value of music.

Unlike Spotify, the new Apple streaming service will not have a free tier. Mr Iovine, the music industry veteran and former Beats chief executive who is running Apple Music, is a vocal opponent of free music. But Apple will offer users three months' free use when they sign up. The company will also unveil a host of new features for its iTunes radio service, which is being revamped by Ian Rogers, another former Beats executive. Among the high-profile moves, Apple hired Zane Lowe, the former BBC Radio One DJ, to work for the radio platform.

This new radio service is expected to compete with traditional BBC broadcasts as much as digital-media start-ups. It will see greater emphasis in Europe, where Spotify and Deezer are more established, but Pandora is not available due to licensing restrictions, according to people familiar with Apple's marketing plans.

Pandora has remained relatively unaffected by iTunes Radio's current incarnation, but is aware of the potential damage it could cause. "I can't pretend that it won't impact our business - it will distract people for a little while," Tim Westergren, co-founder of Pandora, said at a recent dinner.

Record label executives could also be anxious as they watch the Apple Music launch because its success may hasten the demise of downloads, which generate higher margins than streaming.

Mr Mulligan says that, in the short term, the streaming service could further "cannibalise" download sales, which fell close to 9 per cent in the US in 2014, under pressure from services such as Spotify, the market leader. "Within a year to 18 months there will be a noticeable decline in downloads," he says.

One digital-music insider estimates Apple would need more than twice the subscribers Spotify has accrued in seven years to generate the same revenue iTunes downloads make today.

"Given Apple's large revenue base from hardware, it will be difficult for these services to add meaningfully to the model," Gene Munster, analyst at Piper Jaffray, said in a recent note to clients. "However, we believe that the continued build-out of these offerings adds incremental ways for Apple to keep customers on the iOS platform."

Additional reporting by Leslie Hook

Agenda

Synchronised Watch apps brought in to rally support

Music is expected to be the main event on Monday but the Worldwide Developers Conference will also see Apple try to rally support for its latest device, the Watch.

More than 4,000 apps are already available for the Watch after the device went on sale in March. But many early reviewers and buyers have complained about the quality of them, most of which were developed without programmers having access to the device itself before launch.

Jeff Williams, Apple's senior vice-president of operations, said last week that it would improve the Watchkit software tools available to app developers at WWDC. This will include being able to make "native" apps that run on the Watch directly, rather than requiring data to be fetched wirelessly from a paired iPhone each time an app is opened, he told the Code conference. Developers will also be able to access sensors such as its heart-rate monitor, Mr Williams added.

In recent weeks, Apple has offered some developers expedited delivery of a Watch, to arrive ahead of WWDC.

Bernard Desarnauts, founder of Wristly, which makes tools for wearable-tech developers, says that early Watch buyers are downloading few apps. "There's either fatigue or not that many are good. That's something I assume Apple is concerned about," he says.

By Tim Bradshaw in San Francisco and Matthew Garrahan in New York

Source Citation (MLA 7th Edition)
Bradshaw, Tim, Matthew Garrahan, and Leslie Hook. "Apple streaming service leaves iTunes behind; Music industry hopes new offering will provide a model for growth as downloading era appears to be coming to an end." Financial Times 6 June 2015: