Apple’s arrival in the expanding Internet radio field has been as long awaited as its impending launch of a TV, creating expectations that it would do one better than rivals, notably Google and leading specialists such as Pandora and Sweden’s Spotify. In the event Google in launching its Play Music All Access in May 2013 was able to offer streaming radio to iOS users a month before Apple itself did, although in both cases we are talking about the US only for now, with international availability likely late this year. Previously users could only stream music they purchased from the existing Google Play, but now, as with other Internet radio providers, the Play Music All Access service enables streaming of music people haven’t purchased. However it does require a subscription costing $9.99 a month, although $7.99 for those signing up before June 30th.
Similarly Apple’s newly launched iTunes Radio requires a subscription to its cloud music locker iTunes Match in order to get free music without advertising, but this is cheaper at $24.99 per year. Apple is clearly competing hard on price and certainly attempting to repel Google from making any inroads into its user base with the latter’s iOS version of Play Music All Access. It is also undercutting Pandora, its principle rival in the US at present, which charges $36 a year for subscription.
Among other competitors Spotify launched in the US in 2011, but it is in Europe it will provide strongest competition with most of its 24 million active users and 6 million subscribing customers there. Spotify’s subscription base in the US has been held back by price, costing $4.99 or $9.99 for unlimited streaming to all of a user’s devices. Spotify’s strength is its large library of 20 million songs, more than Pandora as well as other US competitors like Slacker and iHeartRadio, with only Microsoft’s Xbox Music ahead on 30 million songs.
And as with Pandora and iTunes Radio, Spotify does have a free ad supported version. This is not the case however for Google Play All Access, which is betting on subscription funding becoming the predominant model for Internet radio, with the appeal being the ability for users to listen to series of songs they like but with an element of surprise.
For this reason Internet radio providers believe that subscriber data and its intelligent use for creating compelling personalized radio stations will become increasingly critical for competitive success. Here Apple stacks up well, even though it is a new kid on the block as far as Internet radio is concerned. Pandora, the leader, has 70 million monthly active users and 200 million registered users, but iTunes as a download service has been going since January 2001 and in conjunction with the iPod portable player rescued Apple from the doldrums into which it had subsided. iTunes sold its 25 billionth song in February 2013 and boasts 300 million users, 50% more than Pandora for radio.
Apple is reckoning on iTunes Radio rippling quickly through this existing base and is probably right that it can confound Google by taking on a lot of ad supported free users. After all existing iTunes subscribers have nothing lose by trying this out, even if they do find the ads annoying. In fact it looks like Apple is looking to ad revenues from its free service subsidizing the lower cost of its paid service compared with rivals. After all Spotify has cut back on free listening per month because it was losing money after paying the licensing costs associated with the songs.
Apple initially hoped that it could score here by exploiting its bargaining power to extract lower costs from artists and the music labels. These negotiations are largely responsible for the late arrival of iTunes Radio and it looks like the labels in turn exploited Apple’s anxiety not to lag too far behind Google and to launch the service at its worldwide Developers Conference (WWDC) this week to up the price. At one time there were strong rumors that Apple had succeeded in pushing the royalty price down to half the level Pandora was paying, but in the end the figure has come back up close to parity.
Negotiations with one of the labels, Sony Music, came down right to the wire over the issue of fees for skipped tracks, with agreement only reached a few days before the launch. Streaming platforms pay record labels a fee each time a track is played but the idea is that users listen to a random sequence generated to their tastes without skipping. However they are allowed to skip a certain number of tracks if they do not like what they hear at the beginning and for this the artist concerned receives a reduced fee, which Apple and Sony in particular found hard to agree on. While the royalty issue was resolved just in time for the US launch it appears to have held up the international extension, just as it has for Google.
At any rate it is certain that Apple ended up facing higher royalty payments than it had expected and as a result will need significant ad revenue to avoid making a loss on the service. For this it will need to gain a substantial free user base, although obviously aiming to gain some brand new subscribers who were not previously iTunes customers as well. Its main strength here is the data. Apple’s stations are powered by its Genius service, introduced in 2008, which scans users’ music libraries to find songs they typically play or own. That gives the company a lead in data about user preferences over its smaller rivals including even Pandora, although it is debatable whether this is a significant advantage over Google. This is because with YouTube Google has the world’s most popular music streaming service of all, except that the songs are bundled with videos.
With one billion unique users a month, Google has the potential to extract YouTube data and feed it into its fledgling repository of subscriber information from Play Music All Access. YouTube has now started a pilot program for a subscription service aimed primarily at video, but again with potential for synergy with Internet radio in terms of subscriber data collection and exploitation.
This brings us back to Apple and its plans for video, which we expect will be resolved later this year. At least iPhone Radio has been incorporated into the current Apple TV box, which provides access to content from Netflix, Hulu and YouTube among others, but from TVs made by other vendors. Apple’s own TV launch has been held up not in this case by rights or royalty issues but by the imperative of getting both the monitor itself and the UI (User Interface) just right.
There is fair agreement over what the monitor itself will look like, with a 60 inch model and possibly also 46 inch model in the initial launch in ultra-thin form and solid glass front with aluminum back to keep weight down, aiming to replicate the aesthetic wow factor achieved by both the iPhone and iPad at their launches.
The UI was also a big factor for iPhone and iPad, and will be if anything even more so for TV, which is why this has been the main sticking point. Clearly there will be some form of gesture or motion control, with some speculation that it could feature a remote control that will be worn on the finger and be dubbed “iRing”. The advantage of a wearable device would be in enhancing motion detection and enabling the user to control an EPG as well as diving into deeper search or navigation by pointing in a way that would be intuitive and quick to learn.
Speculation has also centered on a larger companion secondary device that would be used not so much for navigation but as a secondary TV that can be carried around the house like an iPad for viewing content over Wi-Fi. Of course an iPad itself could fulfill this function, but Apple may see potential for a dedicated ‘mini iTV’ as part of a big screen package, at least as an option.
Apple must be fearing that its iTV could turn out to be at least slightly anti-climactic and fail to match the iPhone and iPad impact, since this fate has arguably already befallen iPhone Radio. It is true that the iPhone and iPad were not the first smartphones and tablets either, but they totally eclipsed early incarnations from other vendors. This has not been the case with iPhone Radio, which merely emulates the competition. It brings no novel features and no innovation, and lacks the ability to play any song from the catalog at any time enabled by both Spotify and Play Music All Access.
But at least Apple is consolidating its position in digital music, which is the one growth area for the music business and its future destiny. Globally digital music accounts for one third of all music revenues and grew 9% in 2012 against just 0.3% overall, indicating that the rest is in decline.