On Streaming: Apple, Beats & Spotify

In response to the rumors that Apple was buying Beats Audio for $3.2 billion, I sent out these three tweets. 

  • Someone wrote that Apple will get design help from Beats Audio. LOL. Beats design is done by an outside agency, started by ex-Apple peeps. (#) [Outside agency is Robert Brunner’s Ammunition Group and Brunner hired Jony Ive.]
  • Google spends $3.2 billion to buy the future & data. Apple buys bad headphones & a junk-service from music promoters. Worse use of corp $$$s. (#)
  • Buying BeatsAudio (aka a Baboon’sAss) is a good sign that Apple is pretty much out of ideas & unable to come up w/an anti-Spotify strategy. (#)

In response to these tweets, many fine folks responded and made different arguments. Some said  that it was about buying a cooler (younger) brand, buying high margin hardware revenue and/or buying into a new category. (Some say, the deal is cheap — apparently Beats Audio was on track to do over a billion dollars in revenues in 2013.

If that brand thing is indeed true, then Apple is in big trouble — because that implies that the Apple brand is not as cool and premium as it has been.  I don’t think that is the case. Revenues aren’t really a problem for Apple. So that leaves them buying into a new category — aka headphones. It makes no sense since Apple can make shitty headphones (and some say they do) and get even more premium pricing that Beats headphones. 

Stream This

So this rumored $3.2 billion deal is all about Beats Audio streaming service which is rumored to have mere 200,000 subscribers, mostly via AT&T. As cloud becomes pervasive and streaming is defacto way of accessing music, Apple will find it needs to have an answer to Spotify and evolve iTunes from what it really is today. The world has moved on from downloading to accessing music via cloud-based services, even though the artists themselves don’t like this transition to a streaming-oriented future

Apple doesn’t have clear ideas about how to do this — especially since downloads are slowing down quite radically so the company had to do something. The iTunes Radio is a bit of a hit-and-a-miss. Pandora still hogs the listening hours on the Internet. Apple can’t really make money off free — iAds is essentially intermittent advertising! And iTunes Match too at best is shrug inducing. This deal is about fighting Spotify and the only way for them to justify the price is that Beats has deals with music labels that allow it to transfer streaming rights to a third party — in this case Apple. 

The deal does puts Apple at an advantage. Others like Rhapsody and Rdio pay a penalty — a 30 percent Apple tax is there is an in-app subscription sale. Apple can push the Beats Audio app on iTunes store to drive up subscriptions. It would allow them to compete with Amazon and Google Play, both companies that are “what-evs!”

For Beats, this is a good escape from a seemingly tenuous situation. They don’t have the cash for a worldwide rollout and frankly, the service isn’t all that good compared to Spotify. With about 200,000 subscribers, they were struggling and had to buckle and agree to pay the Apple store tax (30 percent) a few weeks ago in order to get traction.

At the time of the launch they were full of anti-Apple bluster. The company which employs roughly 1000 people — 350 in Beats Audio and 600+ in Beats by Dre  – is known to stretch the facts a tad, as pointed out by this blogger.

Apple’s bigger problem

So logically, this deal makes sense, but the reality is that Apple has checkered history with cloud-based services. It will need a lot more for Apple to fight Spotify or infact any cloud-native service. The company’s Achilles heel is its inability to come to grips with the cloud. It is not Apple’s fault. Its DNA is beautiful hardware, elegant design and humane software. It hasn’t had to create things with a digital heartbeat. (I know folks are going to defend Apple & iCloud and its massive investment in huge data centers, but I don’t give them any more than a B-minus on their cloud efforts.) 

They have not been able to weave in the data-centric thinking into their products and Beats Audio, unfortunately doesn’t solve that problem. Apple needs software/cloud product leaders, instead they buy media deal makers and marketing mavens.

Spotify has a better mousetrap, they have a lot more data relating to people’s listening habits and they have also been building their own infrastructure, which is much more robust that what Beats has built. Beats infact uses MediaNet to offer its music service, much like some of the other lesser services. The only advantage — deeper recommendation data on top of MediaNet’s offerings.

In the plus column, Apple gets Ian Rodgers, a well respected music-tech executive into their fold, so that might just be good for the iTunes ecosystem. The Topspin assets (artist oriented e-commerce & marketing platform) might be good, especially IF Apple wants to turn iTunes into a much bigger music platform. I will also add that Beats’ cool store in Soho, New York in the plus column.

Bottom-line:  I am down on this deal. This is a reactive move — at best. Steve Jobs’ Apple would have pushed to make something better, but even he struggled to come to terms with Internet and Internet thinking. That hasn’t changed. 

Just for giggles: I compared how many people followed Beyonce and Taylor Swift on Spotify and the numbers were 1.59 million and 1.55 million. On Beats, Beyonce had about 80,000 followers and Taylor Swift had about 26,000 followers. In other words, for now, Spotify is a better place for musicians to make a push. 

FYI: While Financial Times is getting the kudos today, Reuters were the first ones to report on talks back in March 2013.

Responses

  1. Indie Song A Day (@IndieSongADay) says:

    May 27th, 2014 at 11:25 pm Reply

    I wait for the day when a music service does something truly innovative. Apple, Beats, Spotify, Rdio, Mog, Lala and the lot have been walking the same line for a decade. The GUI gets a little slicker but they all suck for music discovery. They are geared for the majority who listen to the radio/Top 40 or the classics they’ve known about for 30 years. Someone needs to open that group up so they are exposed to new music. This is what the artists want, right? More listeners, concert goers and merchandise buyers.

    It seems like there are some obvious steps that one of these companies could take to improve this but everyone is playing it safe. Beats’ curated playlists are just another gimmick that doesn’t do enough. Discovery, notifications, education, awareness… all packaged and tailored to each listener’s habits. That’s what I want.

  2. Soumitra Paul (@Spaulify) says:

    May 11th, 2014 at 4:47 pm Reply

    I don’t understand this deal. At All. Wouldn’t buying Spotify help them take the giant leap towards music streaming? Since, Apple always have had iTunes for Windows, an Apple streaming service (powered by Spotify) for Android, would only have helped them make in roads into Android user base.

    I think this deal begs the question, whether Apple approached Spotify. Did Spotify reject their offer?

  3. boulton clive says:

    May 10th, 2014 at 2:21 am Reply

    Burberry Headphones. Sigh.

    1. Ana D says:

      July 14th, 2014 at 11:07 am Reply

      Hopefully that happens, I’d be first in line! That might actually be possible-brands have been releasing designer versions of tech products for years-Prada for LG, Louis Vuitton headsets and MP3s…fingers crossed for Burberry!

  4. Bill Lauritzen (@Bill360360) says:

    May 10th, 2014 at 12:17 am Reply

    I say screw the music business. Apple got big by looking at what businesses were lame, old school (music, mobile phones) and bringing digital power, hardware quality and insanely great usability to them.

  5. tmread says:

    May 9th, 2014 at 11:13 pm Reply

    Om,

    Beats sold off the Topspin assets you refer to in your post – they went to BandMerch/Cinder Block about a month ago. To my knowledge, what Beats retained from that acquisition was the Artistlink stuff, essentially a way to promote content in Spotify, MTV, and Beats Music itself.

    Less clear is what happened to the Promo Exchange, which leaned heavily on Topspin platform data.

    In any case I would consider it a non-factor in the acquisition. As an employee of Topspin in the first few years (’07-’11) I’d be flattered to think Topspin had something to add to the iTunes ecosystem; the reality is that would be one hell of an integration… and really, not an amazing business to get into.

    Far more likely it’s for Beats Music and perhaps some aspect of the physical business.

    Whatever the case and however it shakes out, I hope it results in some better software thinking at Apple. There’s a real lack of vision there when it comes to software (especially iTunes), which is absurd given their clout and their ability to pay for talent.

    1. Om Malik says:

      May 10th, 2014 at 7:22 am Reply

      Wow! I totally missed that and that is despite following the business. I appreciate your educational and informative comment.

      1. Andy Young (@Tunipop) says:

        June 3rd, 2014 at 2:00 pm Reply

        Bandmerch/Cinderblock acquired the artist roster, but Beats kept the TopSpin technology. It was basically a fire sale and a way save face with TopSpin investors. They knew an Apple deal was in the works. What is more interesting is that Spotify continues to use the Artistlink platform, which will presumably be owned by Apple…or? When Jimmy and Ian first started talking about Daisy (which became Beats Music) merchandise was a core part of the message alongside human curation, but now you don’t hear anything about Artistlink in the context of the Apple deal. In my view, Artistlink is broken, literally. Links don’t work, point to tickets or CD sales, appears that nobody is minding the shop. Trent Reznor is not using it for Nine Inch Nails merchandise, neither is Jimmy’s boy Eminem….what does that tell you?

  6. John Oakes (@joakes66) says:

    May 9th, 2014 at 6:31 pm Reply

    Apple really needs to fix the gapless playback issue introduced with iOS 7.1, as pointed out in this discussion board http://goo.gl/LRllch

  7. Fred Glick (@thefredglick) says:

    May 9th, 2014 at 3:07 pm Reply

  8. Stephen Johnson (@StephenMelon) says:

    May 9th, 2014 at 7:31 am Reply

    There are only so many places on the body that wearables make sense. Headphones are one of the few proven wearable technologies. Headphones that effectively have an entire music library built in (via streaming) = the iPod of the future.

    Beats have huge market share and brand power at the top end of the market, regardless of actual sonic quality. They have replicated the cool factor that made the iPod the must-have device. Apple could enter the headphones market and try to compete from scratch but that’s very risky as Apple headphones have no reputation or cachet. Whereas they can easily add their technology, whatever it may be, into Beats and capture most of the high end of the market in one fell swoop. They have the money so why not?

  9. eideard says:

    May 9th, 2014 at 4:22 am Reply

    I worry when I disagree with people I’ve respected for a long time. And every competent audio geek I know says Beats are like Bose – attractive design, effective marketing, crap quality, overpriced.

    In the same vein, I enjoy and appreciate your critical analysis. The deal doesn’t make sense on the surface and I always tend to disagree with buying companies instead of hiring talent.

  10. Andrew Condon (@afcondon) says:

    May 9th, 2014 at 12:36 am Reply

    I’d just note that, personally, my user experience with Spotify is not good. i’ve been using it for years (paid subscription) but i find the UX poor and the insane number of outbound connections unacceptable. It’s pure inertia that keeps me paying the 5€ a month. That’s just me, but maybe it indicates a basis for competition from somebody.

  11. thebeeobee says:

    May 9th, 2014 at 12:21 am Reply

    ALSO, didn’t Apple just hire someone to get them more product placements in films and whatnot? This Beats move is clearly an extension of that. The brand does need more support especially amongst young people. Young people that never had an ipod and don’t associate Apple with the cool points the scored in the mid 2000’s.

    1. thebeeobee says:

      May 9th, 2014 at 12:26 am Reply

      Here’s the article about the “Buzz Marketing Manager” listing. http://www.businessinsider.com/apple-is-hiring-a-buzz-marketing-manager-2014-5

      This is a very deliberate move to swing the pendulum hard back towards Apple. Period.

  12. thebeeobee says:

    May 8th, 2014 at 11:10 pm Reply

    I really think this move is simply to get the 16-22 year olds who will soon be moving off of their parent’s contracts to buy iphones.

    And it’s a good move.

    Silicon Valley/startup twitter loves iphones but on black twitter, edm twitter, etc. I see so much talk of Samsung phones.

    Apple is a hardware and digital distribution company. Cloud services? Why? What does it matter what cloud service people are using as long as it is on Apple hardware?

  13. intriguingnw says:

    May 8th, 2014 at 10:35 pm Reply

    It does seem like there is a lack of strategic vision here and somewhat sad Apple needs to buy rather than innovate. Seems like a high price for an acquisition that is more me too than a leap forward? But maybe Apple know more what follows next…If you were a shareholder would you pay that much for 2nd rate platform, and so few customers relatively speaking. Clueless on cloud. I struggle to believe the apparent lack of lead here by Apple but seeing is believing and it doesn’t seem to be very jpomwd-up? But they have surprised us before and the obsession with trawling through what Steve J would do needs to stop soon. It needs leadership. Appple that is and some inspiration. Seemingly this deal is lacking the substance to give any key advantage.

  14. Krish (@krishnan) says:

    May 8th, 2014 at 8:06 pm Reply

    The reason why Apple failed in the cloud is due to their device strategy. No cloud provider can be successful with a single device strategy. Microsoft is realizing it now but Apple …..

  15. dylan hassinger (@dylanized) says:

    May 8th, 2014 at 8:04 pm Reply

    It’s not the brand, it’s the customer base. Now Apple can stick their health and app platform into the ears of every young person worldwide.

  16. John S. Wilson (@JohnWilson) says:

    May 8th, 2014 at 7:50 pm Reply

    Enough with the ‘Steve would have done this’ stuff. No one knows what he would do, and, frankly, at this point what does it matter? Suggesting that Apple fears its brand isn’t ‘cool’ enough if they’re purchasing Beats for the brand value, is a bit shortsighted. Nike purchased Converse for the brand value about 11 years ago, spending ~$300M. Since then Converse brings in over $1 billion in revenue each year. Beats could be something similar here. With Apple’s foresight and backing revenue could easily eclipse the sales price in 2-3 years and grow even more beyond that.

    It’s true Apple needs to focus more on cloud-based services, however it doesn’t mean they cannot do that as well as grow the Beats brand and invest in other endeavors.

    1. Om Malik says:

      May 8th, 2014 at 9:31 pm Reply

      I think you just agreed with what I said. Also to be clear, I didn’t even say what would Steve Jobs do, I said Steve Jobs’ Apple would try and do Xx. Different than saying steve jobs wouldn’t do this.

  17. Taste_of_Apple says:

    May 8th, 2014 at 6:43 pm Reply

    Reblogged this on Taste of Apple and commented:
    There’s a lot of interesting analysis here. I agree that this seems like a very unusual thing for Apple to do.

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