Why Apple, Inc. Wants to Kill Free Music

By Evan Niu, CFAFool.com

Apple Music has no free tier. Image source: Apple.

The music streaming model is no stranger to controversy. You're already familiar with the headlines about Taylor Swift ditching Spotify and embracing Apple's new Apple Music service, which is just the latest skirmish in an ongoing war. Artists have long hated ad-supported free services, simply because there's less in it for them. Naturally, the dominant ad-supported free services constantly argue that they pay fair rates and cite various statistics, but that hasn't changed the conversation. Not one bit.

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Apple wants to.

But at what cost?Think of it this way. There's a reason why consumers have been rapidly shifting their preferences away from traditional purchasing models toward streaming models: they get more while paying less. Even if you pay for a premium Spotify membership, you're getting access to over 30 million songs for roughly $120 per year. In the old days, $120 per year might only buy you a handful of albums with dozens of songs. And a lot of people don't pay for Spotify Premium and are happy to suffer through endless ads in exchange.

The flip side of this is that less money is flowing through to record labels and artists. In a way, the streaming model is on a collision course with the sustainability of the music industry itself. This is where Apple, always the music industry's champion and ambassador to the consumer, can make a difference.

The man of the hourApple didn't buy Beats for its overrated headphone business. Apple bought beats for Jimmy Iovine. This act has cemented the Mac maker's bond with the music industry. At Vanity Fair's New Establishment Summit in San Francisco earlier this week, Iovine provided some key insight into Apple's overarching strategy.

Iovine believes that the broader music industry is in decline, and free music is entirely to blame. Apple's music exec considers the ad-supported free model a "shell game," where streaming services are able to build their own audiences at the expense of artists. According to Iovine, streaming services comprise 40% of music consumption, but just 4% of the industry's revenue. It doesn't take a genius to see how that doesn't add up.

All of this is precisely why Apple Music has no ad-supported free tier. Iovine points out that Apple could quickly and easily grow a user base in the hundreds of millions if it were to offer a free tier, but that wouldn't do the industry any favors. Apple sits in the middle, balancing the interests of consumers and industry, and that's a responsibility that the company is not taking lightly, unlike its streaming rivals that struggle to turn a profit as it is. Apple is even reportedly pressuring record labels to kill Spotify's free tier.

Pandora is still posting red ink ($16 million net loss last quarter), despite its growing audience base.

Consumers still winHere's the thing though. Even if Apple is successful in convincing the average consumer to open up their wallets just a little bit more, consumers are still getting great value. Even though Steve Jobs detested the streaming model, getting access to all of Apple Music's benefits for $120 per year sure beats getting a few dozen songs for the same amount.

Once upon a time, piracy was the greatest threat to the music industry. Nowadays, the streaming model represents the industry's existential crisis and Apple might be the industry's savior. Again.

The article Why Apple, Inc. Wants to Kill Free Music originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple 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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