Is Apple Losing Its Music Mojo?

Apple  is expected to launch its on-demand streaming music service at next week's Worldwide Developers Conference (WWDC)... or at least to announce it.  Whether Apple announces or actually launches the service will indicate just how much the dynamics of the digital music industry have changed over the past five years.  Next week's developments will be a litmus test of whether Apple still has its music mojo working.

Signs emerging during the past few months haven't looked too good for Apple.  After it acquired Beats for $3 billion last summer, everyone wondered what it would do with Beats Music, the on-demand streaming music service that looked like a minor sideshow to Beats's juggernaut headphones and consumer electronics business.  After a long while, it emerged that Apple would absorb Beats Music into its own branded music ecosystem.  But despite its advantages -- mainly its excellent collection of curated playlists -- Beats Music has been, at bottom, little different from all the other on-demand subscription music services.  It charges $10/month for unlimited, ad-free on-demand listening, it has no free or low-priced limited version, and it features more or less the same music catalog as Spotify, Rhapsody, Tidal, Deezer,  Google Play Music, Rdio, Slacker Premium, etc., etc.

Although on-demand streaming has broken through to mainstream use over the past few years, attracting tens of millions of active monthly listeners, only a single-digit percentage of users pay for subscriptions.  The vast majority listen to music on demand for free on YouTube, Spotify's free service, and Vevo.  According to RIAA figures, the market for paid subscription on-demand music is growing but still small, amounting to less than 20% of all digital music revenue, compared to over 60% for paid downloads.  And Apple is poised to become yet another player in that crowded field.

Apple has been taking various steps to break out from the pack before launch, without much success. Its first gambit was to convince the major record companies (Universal Music Group, Warner Music Group, and Sony Music Entertainment) to let Apple offer unlimited on-demand music for $5/month instead of $10/month.  When that didn't work, Apple tried for a Netflix-like $8/month, and that failed as well. Then Apple tried to play into some record company executives' dislike of the "freemium" model by persuading all of the majors to stop licensing free on-demand services.  The majors balked at this too (possibly out of fear of price-fixing accusations).  The intent of these tactics was clearly to maim Spotify and smaller competitors, to open up space in the market for its own service, but none of them worked.

One can't help but feel that if this were the late 2000s, after Apple had become the largest music retailer (of any kind) in the world, the majors would have been more pliable.  But times have changed.  Now, although downloads still pull in more revenue, downloads are in decline while streaming services are growing steadily.  A recent survey by GlobalWebIndex found that while 60% of teenagers around the world listened to streaming music during a month, only 21% bought a music download.  Other market research puts the number of Americans who regularly pay for downloads at about 40 million and declining, while the number of people who listen to on-demand music services is more like 60-70 million and growing.

Now it's less than a week from Apple's WWDC, and the news has emerged that none of the three majors has concluded a license agreement for Apple's new service.  To state the obvious, launching a music service without one or more of the majors is tantamount to starting a car without one or more wheels.  Such agreements are often negotiated down to the last minute, and Apple could well launch its service with a full catalog next week.  But if it doesn't -- if it merely announces the launch of the new service "real soon now," or says nothing at all -- then it will truly be a sign that the majors have decided they can dictate terms over Apple -- that Apple has lost its mojo with the majors.

That's not to say that Apple won't have some success from the new service, even if it's a me-too offering.  Apple has an enormous base of iTunes users -- even if they aren't active purchasers -- whom it can potentially convince to pay $10/month for unlimited music on demand.  And we shouldn't discount the possibility that Apple, given its legendary capacity for tight security around product launches, will introduce features large or small that will differentiate the new service from all the others.  Apple has excelled many times at taking innovative products with small user bases and making them huge mainstream successes, as it did with portable digital music players, ultra-thin laptops, and tablet computers.

But the big difference between on-demand music and these other product categories is that it isn't a new type of service.  It dates all the way back to 2002, when Rhapsody became the first on-demand music service to offer content from all major labels.  It may be too late for even Apple to change the dynamics of the market without a truly innovative product.  In any case, we'll find out next week.