By Hannah Karp
How many companies can survive in the high-cost music-streaming
business? Plenty, it appears -- as long as music isn't their main
source of revenue.
Streaming music is just a sideline for the industry's power
players -- Apple Inc., Amazon.com Inc. and Alphabet Inc.
Even so, their influence looks likely to grow. Apple is
revamping its Apple Music app while exploring an acquisition of
streaming service Tidal. Amazon, meanwhile, is preparing to
introduce a stand-alone $10-a-month subscription music service,
matching the subscription fee charged by Apple Music and by
Alphabet, which offers ad-free music through both its YouTube Red
and Google Play Music service.
For the tech companies, paid streaming services aren't just a
new revenue stream. Their strategy is to use the services as bait
to attract customers and hang on to them longer, so they can sell
them something else.
Apple is using its year-old Apple Music service to spur its
sales of iPhones and other Apple devices.
E-commerce giant Amazon, which aims to launch its subscription
service in coming months, mainly wants to encourage customers to
shop. To access Amazon's existing Prime Music service, a customer
needs to be a member of its $99-a-year Prime program.
Alphabet's Google Play Music service and the nine-month-old,
ad-free YouTube Red service from the company's online-video unit
add just a relatively tiny trickle to the company's revenue
streams. But YouTube Red has driven significant traffic to
YouTube's ad-supported site, its core business, according to a
person familiar with the matter.
Because streaming music advances their other ambitions, Apple
Music, Amazon, Alphabet's Google and YouTube units, don't need
their services to be hugely profitable, though none of them are
selling subscriptions at prices that suggest a willingness to lose
money. That gives the tech companies a major advantage over smaller
companies like Pandora Media Inc., Spotify AB and French
counterpart Deezer, whose main businesses are music streaming.
"I think that any company that has some other motive [for
offering streaming] is going to win," said Paul Young, a
music-business professor at the USC Thornton School of Music.
That is at least partly because the music-only companies are
burdened by heavy costs. The paid services typically spend 70% of
their revenue on licensing music and much of the rest on acquiring
customers.
That makes their margins "far too tight," according to Les
Borsai, a music-technology consultant. "The only solution is to
create more value with additional offerings -- aka more than just
music -- and perhaps an increase in pricing, or both."
The services are also at the mercy of the tech companies that
distribute their apps. Apple collects a 30% fee on in-app
purchases, including music subscriptions, so it has an interest in
supporting popular music apps other than its own. But it recently
rejected an update to Spotify's app that didn't comply with Apple's
guidelines.
In a letter to Apple, Spotify's top lawyer called the move
anticompetitive. But Apple's general counsel dismissed that claim,
adding that one of the features at issue with the app was intended
to avoid "having to pay Apple," according to the company's general
counsel.
For the recording industry, the tech titans' embrace of music
streaming has been positive so far, a contrast with Apple's
dominance of digital-music sales.
Record companies are happy to have Apple, Amazon and Alphabet,
three of the country's biggest companies, competing to sell music
subscriptions, as sales of compact discs and digital music continue
their yearslong decline. And there is some evidence they have made
consumers more willing to pay for services. In Canada, consumers
surveyed by Nielsen Music last year said they would pay an average
of $9 a month for unlimited music, up from about $6 in 2014, before
the advent of Apple Music.
But independent streaming services are still crucial because
they tend to drive innovation, and "ensure as an artist, and as an
industry, that you continue to have a direct route to the audience
[and] an option to control your own destiny," said Erik Huggers,
chief executive of Vevo LLC, the music-video platform owned by
Vivendi SA's Universal Music Group and Sony Corp.'s Sony Music
Entertainment.
Spotify, whose owners include the major record labels, has
amassed about 30 million paying subscribers for its $10-a-month
service and 70 million free users in eight years, but its operating
losses widened to more than $200 million last year, despite an 80%
jump in revenue to about $2 billion. The company, valued at $8.5
billion a year ago, raised $1 billion in convertible debt earlier
this year, giving it more room to lose money without raising more
equity.
Spotify declined to comment.
Tidal, which rap star Jay Z launched last year after buying its
corporate parent for $56 million, has built up 4.2 million
subscribers, most of them this year, with a string of exclusive
releases from some of its 20 artist shareholders. But Tidal's
subscriber numbers suggest it is a long way from profitability.
Tidal declined to comment.
Deezer called off an initial public offering in October, citing
"market conditions," and subscription service Rdio filed for
bankruptcy late last year and sold its assets to internet-radio
company Pandora, which is aiming to launch new subscription
offerings later this year.
Write to Hannah Karp at hannah.karp@wsj.com
(END) Dow Jones Newswires
July 24, 2016 18:54 ET (22:54 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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