Will Ap­ple strike a chord?

Firm is ex­pected to un­veil a stream­ing ser­vice that could re­vive mu­sic in­dus­try.

Los Angeles Times - - BUSINESS - By Ryan Faugh­n­der

Ap­ple Inc. is poised to un­veil what an­a­lysts and record la­bel ex­ec­u­tives hope will be a game-changer in the way con­sumers lis­ten to mu­sic.

Tak­ing on the likes of Spo­tify and Pan­dora, the Cu­per­tino, Calif., tech gi­ant is ex­pected to an­nounce a $10a-month stream­ing ser­vice and re­vamped In­ter­net ra­dio fea­ture at its de­vel­oper con­fer­ence in San Fran­cisco on Mon­day.

The mu­sic ser­vice would come 12 years af­ter Ap­ple rev­o­lu­tion­ized the mu­sic busi­ness with the iTunes store and started charg­ing 99 cents a song. Then-Chief Ex­ec­u­tive Steve Jobs called that devel­op­ment “ground­break­ing,” and Ap­ple even-

tu­ally be­came the big­gest mu­sic re­tailer in the coun­try. “Sub­scrip­tions are the wrong path,” Jobs said at the time. “Peo­ple have bought their mu­sic for as long as we can re­mem­ber.”

But much has changed since the hey­day of the iPod. Ap­ple is suf­fer­ing from the world­wide decline of dig­i­tal down­loads as young peo­ple in­creas­ingly turn to stream­ing on­line, crav­ing in­ex­pen­sive ac­cess to vir­tu­ally un­lim­ited mu­sic in­stead of adding tracks to iTunes li­braries.

Now the record in­dus­try is look­ing to Ap­ple to bring sub­scrip­tion-only stream­ing to the masses and help re­verse years of de­clines in the global mu­sic mar­ket. The launch would fol­low Ap­ple’s $3-bil­lion pur­chase of Beats, founded by mu­sic moguls Jimmy Iovine and Dr. Dre, last year.

Record la­bels are count­ing on stream­ing to make up for the decline in dig­i­tal down­load sales and the col­lapse of the CD mar­ket. Down­loads fell 8% world­wide in 2014, ac­cord­ing to the In­ter­na­tional Fed­er­a­tion of the Phono­graphic In­dus­try. Mean­while, the IFPI re­ported rev­enue from sub­scrip­tions is grow­ing fast — up 39% last year.

The mu­sic la­bels hope the stock­pile of credit card num­bers Ap­ple has on file will trans­late into heaps of new stream­ing cus­tomers and big roy­alty pay­ments. Ap­ple, now led by Tim Cook, is in a strong po­si­tion to make that hap­pen. Its iTunes store has 800 mil­lion user ac­counts, giv­ing it ac­cess to a huge mar­ket of po­ten­tial sub­scribers.

Some an­a­lysts said Ap­ple’s en­try into the sub­scrip­tion busi­ness could tur­bocharge the in­dus­try.

“This is ex­pected to be a main­stream, pos­si­bly trans­for­ma­tive an­nounce­ment,” said Larry Miller, a mu­sic busi­ness pro­fes­sor at NYUStein­hardt.

Ap­ple will have to con­tend with a crowded field of dig­i­tal mu­sic com­pa­nies that have claimed slices of the mar­ket. Spo­tify, based in Stock­holm, has 60 mil­lion ac­tive users, about 25% of whom pay $10 a month for its full-ser­vice, ad-free ver­sion. Paris’ Deezer boasts 6 mil­lion pay­ing sub­scribers world­wide out of 16 mil­lion cus­tomers over­all. Oak­land­based Pan­dora, the In­ter­net ra­dio firm, at­tracts nearly 80 mil­lion peo­ple a month, the vast ma­jor­ity of whom lis­ten to its free, com­mer­cial-sup­ported ser­vice.

Un­like many ri­vals, Ap­ple will not of­fer a free, on-de­mand tier.

Record com­pa­nies have wel­comed Ap­ple’s em­brace of the idea that peo­ple should pay for a ro­bust on­de­mand ser­vice. Ex­ec­u­tives have been largely dis­ap­pointed that more stream­ing ser­vice users have not up­graded to paid sub­scrip­tions. The low roy­al­ties from Spo­tify’s ad-sup­ported ser­vice have stoked ten­sions with ma­jor artists such as Tay­lor Swift.

But to have an­other “iPod mo­ment” that changes the mu­sic busi­ness, the com­pany will need to un­veil a ser­vice that is com­pelling enough to get con­sumers to pay af­ter years of them get­ting mu­sic for free, said an­a­lyst Russ Crup­nick of re­search firm Mu­sicWatch.

“There are some re­ally good sub­scrip­tion ser­vices al­ready out there,” he said. “The ques­tion is, what is Ap­ple go­ing to say to the main­stream mu­sic fans that shifts the way they’re lis­ten­ing now to pay­ing a sub­scrip­tion?”

Ap­ple has spent the days lead­ing up to the con­fer­ence in last-minute ne­go­ti­a­tions with the ma­jor record la­bels — Sony Mu­sic En­ter­tain­ment, Warner Mu­sic Group and Uni­ver­sal Mu­sic Group — to ham­mer out li­cens­ing deals for the ser­vice. La­bel ex­ec­u­tives have been push­ing for higher roy­alty rates from the Ap­ple ser­vice than they re­ceive from Spo­tify and oth­ers, ac­cord­ing to peo­ple familiar with the ne­go­ti­a­tions who were unau­tho­rized to speak pub­licly.

Although the com­pa­nies have agreed on the main as­pects of the deals, they were still iron­ing out de­tails Fri­day and the talks could con­tinue into the week­end, th­ese peo­ple said. The record la­bels and Ap­ple de­clined to com­ment on the talks.

To draw in new sub­scribers, Ap­ple is ex­pected to of­fer a two-to-three-month free trial. The re­tooled ad-sup­ported ra­dio fea­ture, which is cur­rently sim­i­lar to Pan­dora, will serve as an en­try point for those new to stream­ing. The re­boot is likely to in­clude an op­tion for ra­dio more sim­i­lar to tra­di­tional AM/FM and satel­lite ra­dio pro­gram­ming. Ap­ple has signed DJs and hosts such as hip-hop star Drake and “Happy” singer Phar­rell Wil­liams for the ser­vice.

Ad­di­tion­ally, the app is said to in­clude a pro­mo­tional fea­ture that would al­low artists and la­bels to upload free mu­sic, videos and other ma­te­ri­als, sim­i­lar to how mu­si­cians use YouTube and Sound­Cloud to de­but new tracks. Iovine and Nine Inch Nails front­man Trent Reznor, who came aboard through the Beats ac­qui­si­tion, have been work­ing on the ser­vice un­der iTunes boss Eddy Cue.

For its part, Spo­tify and oth­ers have ramped up their of­fer­ings ahead of the im­pend­ing Ap­ple launch. Spo­tify re­cently an­nounced it is adding video, news and pod­casts, while San Fran­cis­cobased Rdio has in­tro­duced a new $4-a-month ver­sion.

Though com­pa­nies such as Rhap­sody, Deezer and Rdio have made their mark, the stream­ing sec­tor is still small in terms of users, ac­cord­ing to ex­perts. World­wide, just 41 mil­lion peo­ple paid for an on­line mu­sic stream­ing ser­vice last year, ac­cord­ing to the IFPI. Sub­scrip­tions ac­counted for $1.6 bil­lion in trade rev­enues in 2014, ac­count­ing for about 11% of to­tal global sales for the mu­sic in­dus­try. In the U.S., the Record­ing In­dus­try Assn. of Amer­ica says 7.7 mil­lion peo­ple pay for a sub­scrip­tion.

The re­cent wave of new stream­ing ser­vices have so far failed to make sub­scrip­tions the norm, de­spite com­ing onto the scene with great fan­fare in many cases.

YouTube’s Mu­sic Key ser­vice is still in beta testing af­ter its de­but late last year. Ti­dal, which rap­per Jay Z bought for $56 mil­lion, be­came mired in a public re­la­tions night­mare shortly af­ter its launch at a fum­bled, starstud­ded news con­fer­ence. Even Ap­ple’s at­tempt to shake up the in­dus­try with iTunes Ra­dio in 2013 was met with shrugs from con­sumers and ri­vals such as Pan­dora.

Still, an­a­lysts pre­dict the new Ap­ple mu­sic app may be the real deal. Given Ap­ple’s wide au­di­ence, the new ser­vice could over­take Spo­tify’s sub­scriber count within sev­eral months, said one mu­sic in­dus­try in­sider.

That could con­cern Ap­ple’s many com­peti­tors. How­ever, even ri­vals say Ap­ple’s ar­rival could pro­pel the whole in­dus­try.

“I think of it as a won­der­ful way to ed­u­cate the public on the value propo­si­tion of all-you-can-eat mu­sic for $10 a month,” said Ethan Rudin, chief fi­nan­cial of­fi­cer of stream­ing vet­eran Rhap­sody, which counts 2.5 mil­lion pay­ing sub­scribers around the world.

All has not been smooth sail­ing for Ap­ple lately. Euro­pean Union an­titrust reg­u­la­tors are in­ves­ti­gat­ing Ap­ple’s deal­ings with record la­bels for its stream­ing ser­vice.

And Ap­ple has not al­ways been seen as a friend to the mu­sic in­dus­try. The com­pany, un­der Jobs, was blamed for “un­bundling” al­bums by sell­ing in­di­vid­ual tracks on­line, which hurt record com­pa­nies’ sales.

Although mu­sic ac­counts for a tiny por­tion of Ap­ple’s over­all busi­ness, an­a­lysts say the com­pany still wants it to be part of its iden­tity. And with so much cash on hand, the fi­nan­cial risk is low if it flops.

Josh Edel­son AFP/Getty Images

THE RECORD IN­DUS­TRY is hop­ing Ap­ple brings sub­scrip­tion-only stream­ing to the masses. Above, Ap­ple ex­ec­u­tive Eddy Cue in­tro­duces iTunes Ra­dio in 2013.

Paul Sakuma As­so­ci­ated Press

THE LAUNCH of an Ap­ple mu­sic stream­ing ser­vice would fol­low Ap­ple’s pur­chase of Beats. Above, Beats co-founder Jimmy Iovine, left, Ap­ple CEO Tim Cook, Beats co-founder Dr Dre. and Ap­ple exec Eddy Cue.

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