Apple bought Beats Music and Beats Electronics for $3 billion last year, but it has remained curiously quiet regarding its long-term plans for the maker of headphones, speakers, and audio software.
However, 9to5Mac reportedlast week that Apple will soon launch a rebranded music service that integrates some of Beats' features. The new service will reportedly be integrated into the iOS Music app, which will add expert-curated playlists, context-sensitive radio stations, and the ability to stream or download music to the iTunes library.
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All those functions should sound familiar to Internet radio users, but Apple could launch the service for just $7.99 per month, which would cost less thanSpotify's $9.99 per month premium service but more thanPandora Media's $4.99 monthly subscription fee. 9to5Mac also reported the new app will be launched on Google Android devices.
This wouldn't be Apple's first attempt to disrupt the streaming radio market. It launched iTunes Radioin 2013 to challenge Pandora and Spotify, but that offering still hasn't matched either service's listener numbers. Will rebooting Beats Music give Apple the boost it needs to finally become a contender in music streaming?
Checking out the competitionLet's look at how Apple and Beats compare to the top Internet radio players in the field -- Pandora, Spotify, and Rdio.
Sources:Digital Trends, Edison Research, company and industry websites. *Approximate, based on last estimated numbers.
Although Pandora has the smallest music library, and Apple's iTunes Radio already undercuts its annual fee, Pandora still has the largest user base. Beats' own user base, according to figures leaked last March, is also far too small to generate meaningful revenue for Apple.
The difference between active and paid listenersHowever, Pandora's lead declines substantially in terms of revenue from paid users.Last quarter, Pandora's revenue from ads -- which it uses to monetizes free accounts -- rose 36% year over year to $220 million and accounted for 82% of its top line, with the remainder mainly coming from subscriptions to its ad-free Pandora One service. By comparison, Spotify is the opposite of Pandora, generating 91% of its $395 million in revenuefrom subscribers in 2013, up from 87% in the prior year. The remainder mostly came from advertisements.
Spotify's business model is more sustainable, since it can generate more predictable revenue growth from a smaller group of listeners. Nonetheless, both companies are operating with widening losses, due to high content acquisition costs paid to performance rights organizations such as SoundExchange. In fiscal 2014, Pandora's content acquisition costs rose 30% year over year to $446 million, accounting for nearly half of its top line.
Pandora Radio on the iPhone. Source: iTunes.
It's unclear how many iTunes Radio users are actually paid members, but if Apple plans to undercut Spotify with a rebooted Beats/iTunes app, it could have a tough time making a profit.
Apple's key advantageBut Apple has a key advantage that Pandora and Spotify lack -- a firmly established online music store that gives it impressive negotiating clout against record companies.
iTunes Radio enables listeners to buy and download the streaming track to their iTunes library. Since the iTunes Store has been the largest music store in the world since 2010, a streaming radio station that also advertises digital downloads sounds like a win-win situation for Apple and musicians.
Apple also offers independent licensing deals, allowing artists to bypass SoundExchange and similar organizations, and gives songwriters a 10% cut of advertising revenue -- more than double Pandora's 4% rate. To appease record labels, Apple also offered $0.13 every time a song was played and 15% of the ad revenue during the first year.In the second year, that rate rose to $0.14 per play and 19% of ad revenue. By comparison, Pandora only pays labels $0.12 per play.
Major musicians are paying attention to Apple's offer -- Coldplay, which previously pulled its songs from Spotify, pre-released a new album on iTunes Radio. Beyonc launched a new album on iTunes in December 2013, resulting in a fierce backlash from online and brick-and-mortar retailers. Last September, U2 gaveaway its new album for free to iTunes and Beats users.
Much less to loseApple has much less to lose than Pandora or Spotify in the Internet radio wars. It won't matter if the rebooted iTunes/Beats Music Radio app loses money, since it can serve as a loss leader to boost digital sales at the iTunes Store. Meanwhile, Apple's soaring iPhone and Mac sales will easily offset any losses.
Whether Apple actually needed to buy Beats to accomplish this is debatable, but if the newly unified app spreads to Android, Pandora and Spotify's losses will likely widen as they struggle to match Apple's royalty and subscription rates.
The article Why Apple Inc.'s Beats Music Reboot Could Crush Pandora Media and Spotify originally appeared on Fool.com.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Pandora Media. 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.
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