Days after Spotify announced that it had more than 10 million subscribers to its online music service, Apple announced that it had struck a $3-billion deal to buy the company behind one of Spotify's newest, buzziest rivals: Beats. The challenge for both companies is the same: attracting the mainstream consumers who haven't yet warmed to paying monthly fees for music they don't own.
That's no mean feat. Even at its current level of popularity, Spotify's paying customers are just a fraction of the music consumers in the 56 countries where it's available. And no matter how many users they attract, subscription music services are having trouble turning a profit. According to a widely cited report by Generator Research, none of the subscription services that existed last year (before Beats Music launched) was on track to make money, ever.
There's at least one other question raised by Apple's entry, though: If subscription services surge in popularity, who wins? Because in the view of many artists and songwriters, the royalties from on-demand music streams are too small to make up for the decline they're seeing in music sales. Meanwhile, some music publishers are so unhappy with the revenue they're collecting, they're seeking changes that could make it exponentially harder for services to get the licenses they need to stay in business.
As I've written before, Apple has a track record of waiting to enter a new market until someone else has blazed a trail -- typically without great success. And when it does, it has used its technological and marketing prowess to blow up the market. Witness what happened with MP3 players, downloadable music, smartphones and tablet computers.
Of course, those successes were all on the late Steve Jobs' watch; his successor, Tim Cook, has yet to launch a category-dominating product. But Beats Music will enjoy the same advantage over rivals that the iTunes Music Store did: It won't have to make money. It would serve Apple's purposes just by promoting Apple's hardware sales, which have enviable margins.
None of the other leading subscription services has that kind of cross-subsidy capability. Even Beats, which makes its money selling headphones and portable speakers, didn't have the degree of synergy that Apple does. After all, Beats couldn't preload the music service onto its headphones; Apple can do that with every device it makes that has a screen.
In fact, that sort of music-as-loss-leader approach may prove to be the model of the future. Digital Music News reported this year that Amazon was preparing to bundle on-demand music streaming with its Amazon Prime service, which helps Amazon retain customers for the retailing side of its business. (According to Buzzfeed, though, Prime will include access only to older songs, in the same way that Prime's free video and book offerings are past their, well, primes.)
Apple would also bring a heavy dose of marketing to Beats Music, something no other music subscription services has received. That would help overcome the lack of consumer awareness that has been so problematic for the likes of Rdio and Slacker.
One potential hurdle for all the services, though, is the intra-industry grumbling about the royalties paid.
Music publishers (which represent songwriters) are unhappy with the payments they receive for the songs played by the services' subscribers. According to songwriter David Lowery, Beats Music pays about an eight of a penny per song, which means 100 subscribers would have to play a song eight times each to generate $1 in royalties. Some major publishers have been so disgruntled, they've tried to force music services to negotiate with them directly rather than obtaining blanket rights from ASCAP and BMI under a court-decreed rate. That tactic ran afoul of the federal courts, so the publishers are now appealing for help from federal copyright officials and Congress.
Recording artists collect more per track from the services -- Spotify reported last year that it was paying them between 0.6 cents and 0.84 cents per spin -- but some high-profile recording artists complain that it's not enough to justify the potential loss in sales. They've held their songs off of the services, at least temporarily, making the services less appealing to consumers.
Aram Sinnreich, an assistant professor at Rutgers University and a longtime analyst of online music services, said he didn't see music publishers or artists being able to grab a larger share of the pie simply because the major labels have far more leverage in the negotiations.
"There are some things that digital changes, and some things it doesn't," he said in an interview. "One thing that it doesn't change is that there are 10 million aspiring musicians and three major record labels. The power differential is very, very large."
The good news for artists and songwriters, Sinnreich said, is that the pie is going to grow. His view was echoed by Cary Sherman, chief executive of the Recording Industry Assn. of America, who noted that subscription services are persuading people who'd spent $20 to $40 a year on CDs and downloads to spend $120 a year on monthly fees. "You can't look at the rates, you have to look at the royalty checks," Sherman said. "Those checks are going to get larger and larger as more and more people subscribe."
And the number of subscribers is finally growing fast, more than a decade after the first subscription music service launched in the U.S. The average number of monthly subscribers in the United States grew from 3.4 million in 2012 to 6.1 million last year, Sherman said.
Nor does Sherman buy the notion that subscription services simply can't be profitable. "They wouldn't be in this business if they didn't think they could make money," he said. Companies such as Pandora haven't been profitable thus far in part because they're using the money they make to grow their businesses. "I have every reason to think these subscription services can make a huge profit," Sherman said, adding, "We just have to recognize that these things take a while to build."
Granted, one reason the major record companies and a number of independent labels are more enthusiastic about subscription services than an individual songwriter or recording artist might be is that they benefit from the royalties generated by multiple artists. Put enough trickles of revenue together and it eventually looks like a river.
That's why the labels may prove to be key allies of the services as they try to navigate the controversy over royalties. The RIAA proposed this week to create a new statutory license that would cover all of the songwriters' rights, with music publishers negotiating with the labels that distribute their songs for a percentage of the labels' royalties. Online services would thus have to negotiate licensing deals just with the labels, not with a wide array of copyright holders. The trade-off, though, is that the consolidation of rights would give major labels more negotiating leverage than they have today.