Apple Inc. (NASDAQ:AAPL) revolutionized the music industry when they created iTunes. However, the advent of streaming services left the company lagging behind. Niche companies like Spotify and Tidal offer a “Netflix-for-music” package, where a flat monthly fee grants access to a broad library of music.
By comparison, iTunes started looking like a fossil. So Apple took a page from Netflix Inc.’s (NASDAQ:NFLX) playbook.
The music business used to survive on three forms of revenue. The first came from album sales; the second from radio stations; and the third from album tours. With iTunes, people could buy a song without purchasing the entire album, taking a huge bite from the first revenue stream.
Radio stations are charged a licensing fee for every song they play. That part of the business model is intact, but by and large, the rest of the industry is undergoing a dramatic change. Apple is trying to ride the wave of change, but investors should consider its relative success a bellwether of the company’s broader performance.
We don’t often think of music as Apple’s core business, but they became a distributor by creating iTunes. Their first breakout product after reinventing the firm was the iPod. And last summer, AAPL paid $3.0 billion for headphone-maker Beats Electronics LLC.
Music is woven into the company’s DNA. Continuing to lead the pack is central to Apple’s success. Let’s look at their prospects.
Apple Inc. Goes on the Offensive
If you were watching the 2015 Emmy Award Show, it’s likely you witnessed the tip of Apple’s spear. From the bevy of commercials that aired between wealthy Hollywood liberals patting themselves on the back, one stood apart from the rest.
The ad featured R&B legend Mary J. Blige hosting a listening party with a few friends. After laughing at how they used to spend hours making mixtapes, the ladies open a MacBook and started a computer-generated playlist.
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“It’s like you have a boyfriend who makes you a mixtape in your laptop,” exclaims Blige’s friend. Her friends start dancing and having a swell ol’ time. And who are her friends, by the by? Just Kerry Washington and Taraji P. Henson,—two of the most prominent black actresses alive. No big deal. (Source: EW, September 20, 2015.)
As the commercial hits its emotional peak, we see the words “Instant Boyfriend Mixtape Service” flash across the screen and fade to “Unlimited Music $9.99/Month.” The final frame has Apple’s logo beside the word “Music.” Apple Music. Boom.
There are two more follow-up ads featuring the same cast set to be released later in the week. I can’t emphasize how pivotal they are in Apple’s quest to regain digital supremacy. If Apple can successfully draw the wide base of users into a paid streaming service, the company’s revenues would skyrocket.
Potential Problems? Ask Netflix.
There is a potential hiccup for streaming services. And it’s currently the biggest threat to NFLX shares. As content providers finally understand that people will abandon cable TV for online streaming, they are negotiating tougher contracts with Netflix.
Likewise, record labels and artists will try to extract better deals from music streaming services. In fact, it’s already happening. Taylor Swift made waves in the business world by refusing to license her content to Spotify. (Source: The Verge, March 25, 2015.)
The pop star argued that Spotify was cheapening the value of art by charging a flat fee. Of course, that argument held less weight once Swift joined forces with Tidal, a rival streaming service founded by artists that also charges a flat fee.
While both Tidal and Spotify beat Apple to the punch, the pushback from artists and record labels is a point in Apple’s favour. Unlike Netflix, Apple is a multi-faceted corporate titan. The company has deep pockets and existing relationships with all the major players, giving them a slight advantage over competitors.
The Emmy commercial hinted as much. Although it was an excellent ploy to woo love-struck tweens, the ad also featured a music icon using the service. The message was clearly intended as a warning shot within the industry: we will get the artists and the audience.