Wednesday, June 4, 2014

Should Pandora Be Shaking in its Boots Over Apple's Acquisition of Beats Music?

Apple recently announced it was acquiring Beats, which includes the Beats Music streaming service.

CNBC asked for my opinion about how this acquisition and future moves by Apple could hurt music streaming giant Pandora.

My initial thought was, "Pandora? What about Spotify?"

In the U.S., Pandora is the biggest player. It was founded in 2000, so it's been around a long time. It has history. And it has the Music Genome Project behind it, which largely made it as successful as it has been.

Spotify, meanwhile, was founded in 2006 and launched in 2008, so not quite as early, but it's no newcomer. I think Spotify isn't as much in the conversation at the moment in part because Apple loves to frame its data in terms of the U.S. or North America.

When Apple executives show charts and graphs citing it has the lion's share of operating systems and hardware, it's always for the U.S. only or North America only. It's never worldwide, where Windows and Android currently dominate.

In any event, Spotify didn't launch in the U.S. until 2011.

Anyway, I'm curious to see how Apple will design its revenue model for whatever service it spins out of Beats Music. And for that, it helps to consider what Pandora and Spotify are doing.

According to Market Realist:
"Spotify has a slightly different business model than Pandora. While Pandora generated about 72% its revenues from advertising and the rest from music subscription as of Q1 2014, Spotify, on the other hand, earns the bulk of its revenues from subscriptions and only a little bit from advertising."
Spotify recently reached 10 million paying subscribers. Free users still outnumber paying subscribers by about three-to-one, from what I've read. But that actually seems like a pretty slim margin and great conversion rate.

The real reason, according to most people in both the music and tech industries, that Apple bought Beats Music was for the people, led by Dr. Dre and music producer Jimmy Iovine. Like Pandora, Beats uses humans to curate suggested music channels. People who listen to streaming music, as opposed to downloaded music, are usually interested in discovering new music. And having real humans curate suggested songs to discover is just wildly better than having a computer do it, as we all know from Netflix's list of suggested movies based on movies you've previously watched and rated.

Apple could have one big competitive advantage in this whole thing, and that's in how it can integrate the service right into your Mac, iPhone, iPad, and iTunes player. If it's the default service, people will use it, right? Maybe, but let's not forget what happened with Apple Maps. The first pre-installed mapping app on iOS was Google Maps. Apple then invented its own mapping service, called Apple Maps and swapped Google Maps for this home-grown version. Because Google Maps came pre-installed on iOS devices previously, there was no Google Maps app in the App Store available to download as an alternative (at least at first). Apple Maps was buggy, full of errors, and just not as good to use.

The community complained. Eventually, Google released a stand-alone app for Google Maps (and Apple allowed it into the App Store), and to this day, most savvy iOS users snag the Google Maps app and use it rather than Apple Maps, even though that's the default, pre-installed mapping app to use.

In other words, if an app for iTunes Radio or Beats Music (or whatever Apple calls its music streaming service) comes pre-installed on iPhones and iPads as the default streaming music player, that doesn't necessarily mean people will use it. Users of Pandora and Spotify (and Rdio, and Slacker, and many other services) will still revert to their apps of choice, I think, especially if they are already paying for the service or if they have spent many hours setting up playlists, sharing music with friends, and otherwise investing in the service.


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