Apple Sets Terms and Prepares For Subscriptions
The iPod, iPhone, and iPad seem to have taken over the music market. Apple, in effect, rules like an empire over it all. Yet there are threats. Music licensing seems to be moving towards cloud-based subscription services, and the challenge to the existing mp3-based music model is all too real. Indeed, streaming services such as Rhapsody, Rdio, and MOG provide a simpler, and oftentimes more cost-effective, way of accessing and enjoying music. Apple’s recent announcement of a new 30% levy on all subscriptions via in-apps should be seen in the light of the competition for subscriptions, where the computer company is hoping to prevail.
Subscriptions via in-apps are accessed though an existing application, and are a new and growing source of revenue. Apple has always taken a cut of a third from song and album downloads. Historically, that was the value added by major label distributors to music sales in the physical world. In 2003, when iTunes was launched, the same terms in the physical domain were applied to the new online world. The majors had tried and failed with their own versions of MusicNet and PressPlay, and finally capitulated to Apple, licensing in full their product to them. Unfortunately, they did it on the same terms that they had traded earlier. Now it was the record labels that had to pay Apple, instead of the consumer paying that value directly to the label distributors.
This may be the next iteration of the hold of Apple in the music marketplace, which continues to impact artists and their labels. Apple’s devices are popular, so its decisions affect cutting-edge services like Rhapsody, Rdio, or MOG. In Apple’s model, announced early in February, publishers set the price and length of the subscription, i.e. weekly, monthly, bi-monthly, quarterly, bi-yearly or yearly. Consumers choose and pay accordingly. Then Apple processes all payments, from which the 30 per cent levy is deduced. Apple requires that subscriptions made directly by the publishers at least match or are an improvement over the terms offered in the Apple store. Steve Jobs has made it clear that he wishes one-click purchases to be the norm. Effectively, Jobs is asking publishers of content to adjust prices so that the end user’s experience is simplified. This is good for Apple, because it helps sell hardware, but costly for content creators and aggregators.
The plight of music streaming services, for instance, was described by Rhapsody’s CEO, John Erwin. Erwin argues that “[this Apple-imposed arrangement comes] in addition to [other] content fees that we pay to the music labels, publishers and artists, [and] is economically untenable.” He adds: “The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.”
Erwin is apparently not afraid to pull out Rhapsody from Apple. If so, Rhapsody would still be offered on Android smart phones and on mobile browsers, like Safari on the iPhone and the iPad. Last.fm co-founder, Richard Jones, and Rdio’s CEO, Drew Larner, expressed similar concerns. With the financial difficulties that these companies face already, their frustration with Apple grows.
From a consumer point-of-view, it seems advantageous for Apple to open yet another market. In-app subscriptions could tap into a previously untouched segment of the population. Apple’s apps are extremely user-friendly and the in-app subscription process is no exception. There is no need to deal with credit cards, transactions are mostly one-click away, and users can opt out of sharing their information with the music services. The simplicity of Apple’s approach, and the added privacy, could bring a sizeable influx of new subscribers.
Is Apple in the wrong? After all, companies such as Rhapsody and Rdio are not required to use Apple’s services. And Apple is entitled to charge them. This is reminiscent of the discussions between Apple and the majors over variable pricing. It took a while for Apple to accommodate variable pricing, and in the meantime the labels agreed to Apple’s terms because they feared losing the new online market—then turned legal by Apple for the first time.
At this point, streaming services have several options to weigh. On one hand, they could stick with Apple, accept the cut from profits, and hope that the amount of new subscribers covers the revenue lost to Apple. A similar but more proactive approach would be to raise the price of subscribing to ensure that the cost of Apple’s levy is covered. For after tax earnings to break even, however, it appears that these services would have to raise their prices by more than the levy. The higher prices may discourage potential subscribers and cause current subscribers to cancel their subscriptions.
Conversely, music streaming services could withdraw from the Apple ecosystem completely. If all music-streaming services boycott Apple, the company would be forced to reconsider its stance. The loss of every available streaming service would harm its image of providing a cutting edge music and entertainment experience. Also, Apple isn’t the only company that produces mobile devices that support streaming; Android would gladly pick up the slack.
Many analysts have speculated that Apple may be intentionally putting streaming services at a disadvantage in preparation for launching their own subscription cloud service, MobileMe. Mobile Me is expected early in June, and would corner all the revenue from its service and collect very well from competitors—a smart business plan. Judging by how popular most of Apple’s endeavors are, they may well end up leading the music-streaming market. They recently bought rival Lala, which they will shutter on May 31st. They also invested in a $1 billion data center in Maiden, N.C., which they hope to leverage later in the spring. Apple is still dealing with licensing issues but as the record labels rely mostly iTunes sales, an accommodation is likely.
By Kayleigh Mill
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