Why Record Labels Secretly Love Spotify

By Markets Fool.com


Spotify is the poster child for music streaming. Source: Flickr/Sorosh Tavakoli.

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Last month, Billboard reported that Apple's attempt to persuade record labels to lower the subscription price for Beats had failed. Apple's subscription music service will have to charge $9.99 per month, and any discount will have to come directly out of Apple's pocket, according to the publication.

The news shouldn't be that surprising. Record labels are trying to exercise more control over streaming services like Spotify. The CEO of Warner Music Group said paid streaming services need to be differentiated more from free services -- removing advertisements isn't enough. Taylor Swift's record label, Big Machine, pulled her music from streaming services ahead of the launch of her latest album. In fact, record labels have done a lot to antagonize streaming services -- Spotify, in particular.

But with Apple's impending relaunch of Beats Music, it seems the record labels are secretly in love with Spotify.

"We want Spotify to be a strong competitor"
At the end of the Billboard article, the author cites an "industry source" as saying, "If they're out to kill Spotify, it's news to us ... And it's the last thing we want. We want Spotify to be a strong competitor."

Basically, the music industry doesn't want to make the same mistake twice and give Apple more control than it needs to, like it did with iTunes. Spotify is quickly becoming the iTunes of the last decade, but a revamped service from Apple could provide the counterbalance the industry needs to leverage one against the other. At the same time, it doesn't want to strengthen Apple's position and let it completely wipe out the rest of the competition.

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Therefore, Apple is on its own to build up a strong streaming competitor to Spotify, where a premium subscription costs $9.99 a month. And although it's not in a position to strong arm the record labels like it did last decade, it has many advantages it can use to compete with Spotify and other streaming services.

What can Apple do?
Apple has a distinct advantage over streaming competitors as the company in charge of the iPhone and its software. Apple can pre-install its streaming service on iPhones, iPads, and Macs, just as it does with numerous other apps it makes like Maps, Newsstand, and iTunes. Ask any app company -- simply getting a user to install the app is half the battle. Apple is the only company that can make that decision for its users.

Additionally, Apple is able to access APIs that it doesn't open up to third-party developers like Spotify. Apple can link its streaming service to Siri, the lock screen, and access other software and hardware built into the iPhone. That would give Apple a distinct advantage in functionality that none of its competitors could copy.

Beyond the advantages afforded to it by owning the hardware other streaming services run on, Apple has one more big advantage over the competition: money. Lots of it. If Apple really wants to protect its position in the music-distribution market, it needs to spend some of that money in order to attract subscribers from Spotify, et al.

If Apple wants to offer the service for less than $9.99 per month, it will have to go out of pocket. Google did this with early Google Play Music All Access subscribers, who received the service for $7.99 permanently. It also offered the first six months of YouTube Music Key for $7.99 a month to early subscribers.

That's a marketing expense Google was willing to take on because it knows one of the biggest ways to differentiate a streaming service, where catalogs are all very similar, is through price. The $67 billion in cash and investments on its balance sheet don't hurt, either.

Money talks
Even if it can't get the record labels' help on pricing, Apple could convince record labels to help it differentiate its service on content. Apple could make deals with labels for an exclusive streaming window for new releases, for example.

That's exactly the kind of thing for which record labels want to foster competition. It puts more money into the labels' pockets, and gets more people interested in a paid music streaming service -- like Apple's. With $178 billion in cash and investments, Apple might be able to buy out a month's worth of streams of the next Adele album.

As long as Apple's coming to the labels and asking them to cut it a break, the labels are going to support Spotify. With all the advantages Apple currently has over the competition, the labels aren't going to do it. Instead, they're going to figure out how they can best help themselves, and that means convincing streaming services to pay them more.

The article Why Record Labels Secretly Love Spotify originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.