Apple announced a new streaming radio service today, but that doesn’t mean it’s about to drive its competitors out of the the digital music business. It’s trying to adopt a business model it already helped kill.
Apple’s new product promises to use its existing Genius music-recommendation software to create a free custom radio experience for users, tapping into the 26 million track iTunes catalog. That’s bad news for Pandora, the original online music radio station, which serves its own music library to users through a proprietary DJ algorithm, but without the advantages of Apple’s massive distribution infrastructure or cash trove.
Pandora’s business has yet to generate a profit, despite commanding a major share of the online radio marketplace and more listeners than many traditional radio conglomerates, like ClearChannel. Apple hopes that giving customers the option to immediately purchase tracks they like from the iTunes store will be a revenue booster, essentially creating a loss-leading discovery service for its already-successful content sales business.
The problem is that in our post-Napster reality, Apple’s content sales business has helped drive the commodification of the digital music market, reducing the cost of music. That has made the effective price of a digital track negligible, whether a consumer pays $1.99 for it on iTunes or simply downloads it illegally for free.
This has created the space for new services like Spotify and Rdio to give consumers on-demand access to massive music libraries, either with ad-supported free versions or with flat fees for a premium experience, usually around $10 a month. Apple’s radio could bump up its iTunes revenues, but it probably won’t attract that many new users. Do you want to hear that new Daft Punk single sixteen times in a row, or listen to a collection of Daft Punk-inspired artists? I suspect many people would vote for sixteen hits of the Daft Punk song. In that case, on-demand services will win out, especially since they offer their own radio-like music discovery services.
To coin a phrase, why would listeners pay for the cow (streaming radio) when you can get the milk (access to on-demand songs) for free, or at least at a competitive price?
Musicians and their marketers, of course, do not like how the commodification of music has obliterated their revenues. The music business has been trying to make up for lost music sale revenues with more touring and merchandise. Complaints about the meager licensing fees from online music services abound, but it’s doubtful that Apple would be willing to pay labels enough for exclusive licensing deals to sideline its many streaming competitors.
Given that reality, on-demand streaming services will continue to compete with Apple’s iTunes store, as long as they maintain the size of their digital libraries and their own radio options; the social features, including playlist and track sharing, are gravy when it comes to customer retention and engagement.
Just look at what the other tech behemoth entering the digital music space is doing: Google’s new service—Google All Access—will give users who pay a $9.99 monthly fee the ability to stream any pick from its entire catalog of music in its online store, Google Play.