It appears that Apple is in the “revolutionizing” business these days when it comes to music. Following recent news that U2 and Apple are collaborating on a new format to reinvigorate music downloads, Apple has reportedly initiated talks with major record labels as part of an effort to be able to sell its Beats Music streaming service for less than the $10/month industry standard. The news comes in a report from Re/code citing sources “familiar with the company’s thinking.” The proposed pricing change appears to be one piece within a larger bundle of rights and features with which the company is approaching music labels.
There have already been a fair share of twists and turns through the rumor mill in Apple’s integration of its recently acquired Beats Music imprint, but this week’s news could potentially indicate a new course for the company — one that in no way involves shuttering the million-dollar streaming service, as was recently rumored.
The streaming biz isn’t exactly a cash machine. Pandora, Spotify, and others have done well when it comes to garnering subscribers, but the price of offering all of that licensed music has lead to razor thin profits for such firms — if they’re profitable at all. The reason is centered around the way many services pay royalties to music labels. As Bloomberg Business week reports, unlike cloud companies from other industries, which see gains in profit margins as they increase their user base, Spotify and other services pay royalties as a fixed percentage of their total revenue. That means the more they bring in, the more they pay out — ad infinitum.
However, while Spotify’s recent revelation that it’s cracked 10 million users is impressive, it’s certainly not Apple impressive. That’s why Apple may be able to change the game when it comes to the streaming paradigm. Right now, the magic number for paid subscriptions from major streaming services is set at that $10/month level. Looking for a way to boost the sluggish growth of Beats Music, Apple wants to bring that number down. And if any company in the industry has enough clout and influence to do so, it’s the folks in Cupertino.
Conjecture has swirled around Apple’s possible plans for Beats Music practically since the first moment that the company threw down its initial $3.2 billion offer for Beats Electronics. First, there was the New York Post assertion that Apple might have dropped its first offer to an even $3 billion after catching wind of Beats Music’s struggle to pick up subscribers. Then came TechCrunch’s claim in a report (citing “prominent employees at Apple and Beats”) that Apple was actually planning to shutter the streaming service, quickly followed by an update that Apple had denied the rumor outright.
Today’s news seems to make a strong case that Apple has no plans to put Beats Music out to pasture. Instead, it is trying to simply change the rules of the game, like only Apple can. As such, many have called Apple’s bold new move the beginning of an all-out music streaming price war. While that may or may not be good for other streaming services, it certainly seems to be good for streaming service subscribers.
Whether Beats Music remains a standalone entity or is swallowed up within Apple’s own iTunes Radio, one thing’s for certain: Apple didn’t pay $3 billion for the whole Beats package only to toss Beats Music aside. And this week’s news could be a sign that Apple does, indeed, have grand plans for the streaming service. In particular, it seems Apple is attempting to make streaming a more profitable venture for itself, which, first and foremost, requires knocking on the big labels’ doors.
According to Re/code‘s sources, discussions have just lifted off and are still in a somewhat early phase, so we might not see any real-world results from these talks until at least next year. Regardless, we’ll continue to monitor the situation and keep you informed as the negotiations progress.
