First take: Potential Apple-Beats Electronics impact

Apple’s track record with services is pretty awful, but it could be acquiring talent and its cost of streaming music customer acquisition will be much, much lower than anyone else’s. Spotify and Pandora should be terrified, but don’t expect Apple to re-invent music this time around.

What it means

While the digital music industry – chiefly Pandora – bemoans the cost of content licensing, the real problem has always been customer acquisition costs. Artists – and labels and publishers – will always have to be paid. The most successful digital subscription model has always been satellite radio, which has a phenomenal conversion rate due in part to free trials bundled with new car purchases. Apple can essentially do the same thing with iPhones and iPads. Digital music services have tried – with carriers, with handsets – but largely failed. Cars are still an open opportunity.

Apple could make its own crummy, cool-looking, overpriced headphones any day. If Apple is buying “cool,” it’s a sign of desperation.

Whom it affects

Spotify – the leader in streaming music already had an unsustainable business model. Its upfront guaranteed fees paid to the labels, and its ownership by them, is a pattern only US congressional budget-making can top in terms of putting off disaster for later. Spotify is not even a good acquisition target for anyone without massive money-making prowess elsewhere. Can you say “Google?”

Pandora – the best thing about Pandora right now is that it’s starting to prove it can sell mobile ads. It needs distribution desperately. It should be all over auto companies. Yes, music radio is a fundamentally different product than on-demand music, but Apple’s brand clout with users and partners could be overwhelming.

Other streaming music – likely doomed to niche-dom. Plenty of room for heavy duty curation and focus on aficionados, genres. Everyone needs distribution, and there are lots of handset companies and carriers.

Other device manufacturers – see “other streaming music” above.

Amazon – wouldn’t want Spotify. Needs music. Probably has more devices on tap. Likely to go its own, and remain a serious, long-term player. Rhapsody might make a nice acquisition.

Record labels – no significant change. Apple will modestly accelerate streaming adoption, but will command better deals due to volume. Do artists lose? Gee, I hope not.

Relevant Analyst
P1040724

David Card

VP Research Gigaom Research

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