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.

A letter from Om

Sign up & get it delivered to your inbox