Why Spotify Should Be Very, Very Afraid of Apple Music

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Listening to iPhone music At New York nightclubPhoto: Bill Hinton/This image is subject to copyright.

Today, Apple unveiled its long-awaited streaming-music subscription service, charging $10 a month for unlimited access to a huge catalogue of songs. With that, the world’s most valuable company dove headlong into the most contested space in the music industry — and a growing one as well, with subscription sales climbing 39 percent last year alone, to $1.6 billion. It faces steep competition from established players including Spotify, Rhapsody, Rdio, and Google Play: All Access, as well as newer upstarts like YouTube’s Music Key and Jay Z’s Tidal. But even given Apple’s late, late entry, there are reasons that its rivals should be very, very afraid.

As announced, Apple Music will operate much like Spotify or Rdio’s premium services, with a radio service tacked on. For $10 a month, users will be able to listen to any song that Apple has the rights to, without the bother of listening to advertisements. Users can create playlists of their own, just like on Spotify. They can listen to them offline, just like on Spotify. They can skip songs, just like on Spotify. They can jam out to a wide variety of playlists, just like on Spotify. And they can listen to as much celebrity-curated internet radio as they want to, too.

Music has had a very rich history of change, some of which we’d played a part in,” Tim Cook, Apple’s chief executive, said today. And now it’s ready to get in on the next big wave. “It will change the way you will experience music, forever.” 

That seems like a serious overstatement: Apple Music in reality is a same-same offering in an already-crowded space, a mish-mash of other, familiar services. The question for consumers is why to bother switching or signing up for a second subscription, especially if you can get similar, advertisement-supported options for free. And the question for competitors is how much to worry about the business responsible for the horror that is iTunes entering an already-crowded market.

That second question seems easier to answer than the first, and it comes down to cash — namely, that Apple has vastly more of it than any of the competitors mentioned, including Google. Take current industry-leader Spotify. Last year, its revenue grew a whopping 45 percent to $1.3 billion. But the company still ended up about $200 million in the red, as its spending on product development and an international expansion swamped its income. Those losses are manageable for the moment, given investors’ willingness to plow money into the rapidly expanding business. But they might not be forever, particularly not if other cash-rich companies look set to force Spotify to keep running in the red. And there is no business on earth that could do that like Apple could: It currently has $178 billion-with-a-b in cash on hand, sitting idle, seeking businesses to plunder and rivals to destroy.

What could it do with that cash to soak up market share? It could undercut its rivals on price, charging $5 or $8 rather than $10 a month. It could offer labels and artists exclusive contracts, bringing listeners artists like Taylor Swift and the Beatles. It could provide bands with a better platform to bring fans new content. It could offer a larger proportion of subscription revenue to record labels. Indeed, it has considered or is considering doing all of those things, as Bloomberg and other outlets have reported. 

For its rivals, that could mean paying out more for music, or seeing users leave for a cheaper or a better product. It is a prospect that Spotify’s Daniel Ek has already been forced to address. “Obviously, it’s easier if they want to absorb the costs into other places. But we believe in the business model of Spotify, and believe that ultimately we’ll become profitable at some point,” he told The Guardian this month.

On top of that, Apple’s giant war chest could help it beat its rivals on the basis of streaming quality, sync speed, and other technical matters. The company is reportedly putting $1 billion into infrastructure to help improve its cloud-based products, even contemplating building “long-haul pipes connecting Apple’s data centers in California, Nevada, North Carolina and Oregon” to densely populated markets.

Then, there is the tremendous advantage that Apple has by virtue of its existing hardware and software, meaning the iPhone, iPod, iTunes, and the Apple Watch. This is where it might appeal to consumers already inundated with similar on-demand streaming and free radio products. Say that Apple Music gave you a single place to control all the music that you own, plus your cloud-based playlists, plus your curated radio stations. Say it always worked seamlessly as your products updated. Say it came already installed on your new phone, with a free trial offer. You’d be likely to at least try it, is my guess, and Apple’s too. 

At the announcement, Beats’ Jimmy Iovine described the current state of music consumption as “confusion”: You go one place for streaming, another to buy music, another to follow artists. The promise is that Apple Music might end that “confusion” — or “series of specialized services,” as I prefer to think of them. “All the ways you love music,” the company promised, “All in one place.” That does not seem like the most compelling pitch to me, given the ease of using Spotify and Rdio right now. But the company’s war chest and its iPhone penetration do give it a frightening advantage, even given how late it is getting into the music-subscription business.