Seth Schachner 

Will Apple’s acquisition of Beats help grow its digital music revenue?

As streaming services cannibalise downloads, Apple's purchase of Beats enables it to embrace premium music-streaming
  
  

With Apple's purchase of Beats, the company  is buying a hip headset brand, with a struggling but co
With Apple's purchase of Beats, the company is buying a hip headset brand, with a struggling but cool streaming music service included. Photograph: Adam Hunger/REUTERS Photograph: Adam Hunger/REUTERS

Apple's apparent $3.2bn (£1.9bn) acquisition of Beats is headline-worthy news. The world's most successful consumer tech company is buying a hip headset brand, with a struggling but cool streaming music service included. Apple gets an accretive, high-margin, fashionable brand that it can integrate with its devices, future wearables, plus a platform for music subscriptions and senior music executives to boot. Not everyone supports it – some have even argued that Apple is making a bad fashion statement with the rare purchase.

However, the reasons why Apple has struggled to grow its music service are more interesting and potentially telling for digital music's future.

Launched in 2003, Apple's iTunes store has become the music industry's most important retailer. The 99-cent "a la carte" track download, which Apple perfected (but didn't pioneer) has always been a simple model. This approach, tightly integrated with Apple devices, resonated with consumers and blew away virtually all of Apple's download competitors. (Circa 2000, there were many digital music pretenders to the throne.)

These days, music is far less material to Apple's business than hardware, iPhones, or its app store. And Apple is actually not a leader in digital music's next wave, the streaming access model – where listeners essentially rent music.

Apple could certainly develop its own streaming access platform to compete with Beats or Spotify. It even bought a streaming service called Lala five years ago. But thus far, its only true steps in music streaming are the iTunes Radio and Match services, neither of which have set the world on fire. The backbone of the new Apple Beats streaming service could be MOG, a tiny but talented music-streaming service that Beats acquired and rebranded three years ago.

As streaming services such as Spotify, Deezer, and even aging Rhapsody grow globally, Apple's download sales declined for the first time since the iTunes store launched. It is clear that streaming is a great alternative to buying, and it is very likely taking a chunk out of download sales.

A premium music-streaming model is a huge step for Apple. It's a bet that, with scale, Apple will incrementally grow its digital music revenue. Put simply, if enough consumers pay to subscribe to Beats or any new Apple music subscription service, this will offset the number of potential "a la carte" buyers Apple will lose in the iTunes store.

Major labels have clearly done the sums here, and hence are willing to license (and in some cases take equity interests in) freemium services such as Deezer and Spotify. Yet Apple clearly needs a stake in the game in streaming music, and Beats may be it. And Beats itself, despite an ambitious content strategy and a partnership with AT&T, has not grown as expected.

One critical factor to consider is Apple's culture. As those who have worked with Apple's music teams over the years know, the company doesn't wear success lightly. To put it mildly, digital music business meetings with Apple are not typically give-and-take ideation sessions. "This is how we do it" is a common theme.

The Apple store is a behemoth, and the processes for working with iTunes are not particularly flexible, improvised activities. Want a promotional "brick" in the store to promote your new release? Get in line, and make sure you follow directions precisely. Interested in having your artist appear at an Apple event like Live in SoHo or participate in Apple's trade marketing? Take a look at this big bound notebook to see the ground rules.

You can imagine the processes and interests here. And one can see how Apple might take the rare step of looking to outside help for its next steps in streaming. Even more telling will be how Apple chooses to integrate and work with the new Beats teams going forward.

Seth Schachner is the managing director at Strat Americas. You can follow him on Twitter @SethASchachner

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