Smartphone Makers Prep for a Rough Spell

Mobile ▶ Device and parts makers look to diversify with cars and appliances ▶ “You couldn’t help but wonder how long the party could go”

analyst at brokerage BGC Partners. The streaming service has racked up 13 million subscribers in the past year—more than a third of Spotify’s eight-year total and an enviable figure for most companies. There are, however, about 1 billion active Apple devices out there. “They have subscribers because of their platform,” Gillis says. “If you have that kind of subscriber base, you should have millions of subscribers.”

Apple bet big on Beats, a company helmed by entertainment industry veterans including Jimmy Iovine. Beats cost $3 billion, at least three or four times the size of a typical big Apple deal. The idea was that Iovine’s team would blend its music-business experience with Apple’s technological expertise. Instead, the two camps have clashed, and Apple is still struggling to unify its streaming and download businesses into a cohesive music strategy, say the people familiar with the matter.

When the Beats team joined Apple, itunes was in decline. Iovine and his colleagues recommended that the company de-emphasize downloads and plow money into a Beats-derived service instead. Apple executives agreed, even scrapping the international rollout of an itunes radio service just hours before its intended announcement. Employees who’d been working on the project for more than a year were told it would be rolled into what would become Apple Music.

The reviews for Music were mixed. Critics praised the depth of the catalog but trashed its confusing interface. “The app’s design is cluttered with too much information and difficult to navigate,” wrote CNET. Apple content head Robert Kondrk and Nine Inch Nails frontman Trent Reznor are overseeing the redesign. Design chief Jony Ive’s team has also provided input, along with Iovine and longtime Apple services exec Eddy Cue.

The bigger challenge may be Apple’s fear of cannibalizing its valuable download business. Annual revenue from itunes album and song purchases has held steady at almost $3.5 billion, close to triple the revenue from Apple’s streaming subscriptions, say two people familiar with the company’s finances. So Apple feels less urgency when Music is included in the streaming bans, selective or otherwise, that have become a common feature of album releases from the biggest musicians. You couldn’t hear Beyoncé’s Lemonade on Music when the album dropped. Same for Kanye’s The Life of Pablo (though the team tried to get it) and Adele’s 25.

Music producer Iovine is leading the effort to improve those results. He got the exclusive on Drake’s latest album, Views. When Taylor Swift bashed Music last year for not compensating artists enough, Iovine negotiated the truce that put her in the company’s ads, say two people familiar with the deal.

Several current and former staffers say product development has been harmed by a complicated leadership structure. Iovine is Music’s top executive, and Reznor has a strong influence on the look of the application, but Kondrk largely runs the 1,000-member team’s day-to-day operations from Los Angeles, while Cue provides overrsight from Cupertino. More than once,ce, Iovine has conducted parallel negotiaiations with artists’ managers and labels,els, unbeknownst to other Apple agents pursuing the same deal, say two people familiar with the matter.

Likewise, many Beats veterans haveve found it tough to cope with the laboririous approval process, which requireses a vice president such as Kondrk to signign off on almost everything. In August, , former Beats CEO Ian Rogers left Apple for luxury giant LVMH. Other departures have included Beats’ product head, chief designer, vice president for engineering, and senior visual designer, some of whom left within a few months of the acquisition despite the deal’s incentives to stay for at least a year. The staffers who quit either declined to comment or didn’t respond to interview requests.

Rogers’s departure was particularly troubling for many on the Music team. A skateboarder who got his start in tech by building a website for the Beastie Boys, he struck a delicate balance between artist and engineer. After almost a decade of turbocharged sales, the $423 billion smartphone industry can no longer count on consumers to upgrade every two years. Warning signs of a sputtering market spilled into the open at the end of April, when Apple announced its first quarterly sales decline in 13 years, and research company Strategy Analytics reported the first drop in quarterly smartphone shipments, by 3 percent. “You couldn’t help but wonder how

The bottom line Apple is planning a sweeping redesign of its year-old, lackluster streaming music service.