Wednesday, April 08, 2015

Apple Streaming Music Service: It’s a Solution, Not a Problem

The parties lining up to battle Apple are simply acting with their wallets in mind ... and several are fighting the wrong battle

Recent news has been packed with reports and endless discussion of the European Union’s investigation into possible violations of antitrust regulations by Apple Inc. (NASDAQ:AAPL). Last week, Reuters reported that the European Union had initiated an investigation to determine whether AAPL engaged in illegal behavior with respect to the formation of its streaming music platform.

Apparently, the EU’s Competition Commission is concerned that the tech giant may use its global influence to“unfairly squash no-fee streaming services.” To that end, regulators have sent questionnaires to record labels. Reportedly, the surveys focus on contract negotiations and agreements with AAPL.

It’s interesting that the Apple streaming music service has caused such an uproar, considering it isn’t expected to go live until at least the summer.

The question is: Is Apple really acting illegally, or is it doing what it has done in just about every other market it has tackled — innovating, revolutionizing and disrupting?

AAPL’s Problems Might Spread to the U.S.

Depending on the outcome of the Apple streaming music investigation in Europe, AAPL could face significant penalties — the Competition Commission can impose fines up to 10% of Apple’s global revenue. Considering that Apple reported total revenue of almost $183 billion last year, the maximum fine could be as high as $18.3 billion.

The New York Post also reported that U.S. regulators have begun questioning executives in the music industry in preparation for a domestic antitrust probe into Apple and its streaming music service. The Attorney General in New York has taken things a step further by issuing subpoenas to record labels, demanding information about dealings with AAPL.

Again, the issue is “a concern that Apple will use its global dominance to push the music business not to license its songs to freemium services.”

And apparently, a number of parties are taking exception to Apple’s dealings.

Competitors Are Threatened by a PAID Model?

A Tech News Today article states that “Apple is taking undue advantage of of its position and relationships in the industry and the company’s music streaming service should be brought to a halt.” The article explains that the decision by AAPL to offer its streaming music through a paid subscription model only, with no option for an ad-supported free version, is what defines the company’s “taking undue advantage.”

The comical part of this fiasco is the claim that, because Apple streaming music will not be offered for free, it creates an antitrust issue.

Apparently, competing services from Pandora Media Inc (NYSE:P), Google Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Spotify stand to lose revenue if Apple’s streaming music platform goes live, as the sheer number of consumers who would probably begin using the service would result in fewer people using freemium platforms.

So, just to be clear, Apple has succeeded in developing products and services that people actually want, and the company’s newest venture is streaming music. But since Jimmy Iovine, AAPL’s exec in charge of the new service, doesn’t plan to offer it for free, the existing platforms that do offer free streaming music claim they will somehow be at a disadvantage.

These competitors seem to believe that millions of people will suddenly stop using their free services and begin paying a monthly subscription to get streaming music from Apple.

Record Labels Jump on the Bandwagon

In addition to AAPL competitors complaining about the company entering the streaming music arena, record labels have also jumped on that bandwagon.

The “Big Three” recording companies — Universal Music Group, Warner Music Group, and Sony Music Entertainment — have taken up positions against the Apple streaming music service.

But their beef isn’t with an AAPL monopoly. They’re just looking to prevent the creation of yet another streaming music service.

A large portion of revenue for record labels comes via sales of physical CDs and digital downloads, whereas revenue from streaming music platforms is miniscule. Naturally, the music companies will do anything they can to thwart the evolution of the industry.

Musicians Take Anti-Streaming Positions

The artists themselves are very much anti-streaming, too. But this also has absolutely nothing to do with AAPL or its upcoming streaming music service; royalty revenue is paid to musicians by the record labels, not the streaming services.

Music Business Worldwide reported that most artists receive only 68 cents of every $10 paid for subscriptions to streaming music services such as Spotify. That must not be high enough to put food on musician’s tables. In particular, last year’s temper tantrum by Taylor Swift comes to mind — in November, she pulled all of her music from Spotify’s streaming service, claiming the revenue she received wasn’t high enough.

Her payouts from her music were on track to exceed $6 million per year. Meanwhile, if her label was taking the average 73% reported by Music Business Worldwide, we’re looking at a roughly $64 million chunk out of a total $88 million pie.

So perhaps her anger and frustration should have been directed at her record label and her royalty contract.

Final Thoughts

Streaming music is the future. CDs are nearly extinct and will soon join their portable album ancestors (cassettes, 8-track tapes, and vinyl records). Digital downloads are still very much alive, but as consumers realize the convenience of streaming music services, those, too, will become a thing of the past.

The EU can dig around all it wants, but the problem in the music business right now isn’t Apple’s streaming music service — or any streaming music platform, really. It lies, instead, with the royalty contracts between musicians and record labels.

The Big Three music labels have lorded control over the industry and the musicians for decades, so they’re going to fight tooth and nail to stop Apple from disrupting things. The musicians, many of whom are held hostage by contracts that only benefit the labels, will of course side with the studios.

As for the monopolistic situation that may exist when the Apple streaming music service goes live? Well, competitors such as Spotify, Pandora, Google and the rest must learn to adapt. We live in a capitalistic society, and it goes against that paradigm to punish a company — in this case, AAPL — for creating a product that’s more desirable than what’s currently available.

Article originally appeared on InvestorPlace (04/08/2015)

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