The Great Apple Music Pivot

Apple Music is the right product at the wrong price. Music subscriptions based on human curation and discovery are the future, but putting more than 30 million songs behind a paywall won't help facilitate widespread adoption. Apple Music's family plan option will give the service life, but more is needed. The free music subscription model will eventually be too difficult for Apple to ignore. By pivoting to include free music, Apple Music will then be in a much better position to put the business of music on a path to sustainability. The music industry needs its "App Store" moment, and the combination of free music, Apple's premium user base, and Apple Music's Connect would be the closest thing yet to that vision becoming a reality.  

Apple Music Ambitions

While the press has run with the Apple Music versus Spotify storyline, in reality, Apple's music ambitions are much more grandiose. Apple is once again trying to build music sustainability by selling an all-encompassing music service. There is precedent for such lofty goals as the iTunes ecosystem presented the music industry with a much needed reprieve from the rise of piracy and genuine questions of music's sustainability. Apple relied on a service that capitalized on ease of use to stoke demand for paid music downloads. Ten years later, while things may have not changed much as labels are still making short-term decisions guided by money, and there are renewed questions around music sustainability, we now live in a world where free music subscriptions are gaining momentum and acceptance.

One reason Apple is fully embracing paid music streaming and avoiding a free music steaming tier is to change the perception surrounding music's inherent value. By having consumers look at music as something worth paying for - a good with inherent value - it will be easier to get people to pay for music through other mediums in the future. A culture based on free may not bode too well when trying to sell new music initiatives and services. Take a look at the App Store for evidence of this trend. 

As Spotify has shown, when both a free and paid streaming option are available, a vast majority of users stick with free. With Apple Music, by not offering a free music subscription option, Apple is trying to increase the paid tier's value as that would be the only way to enjoy the full service being sold. There is no question that Apple Music will gain users, and I would go so far to say that it would be shocking if Apple is unable to become the largest paid music streaming service. It helps that Apple's user base is comprised of premium smartphone users that have shown the tendency to spend more on apps and other content.  However, I doubt it will be enough to move paid music streaming far beyond the segment of the population that has been paying for music all along.

The Record Labels

In today's disjointed environment where digital music industry revenue is still coming from many directions, record labels continue to spend big money on marketing and promoting their portfolio of music artists in an effort to gain mind share and exposure. The IFPI estimates that over the past five years, labels have spent $20 billion on artists and repertoire (A&R) and marketing. In this environment, free music streaming is an attractive proposition for record labels because their portfolio of artists is able to reach a much wider audience. Simply put, record labels have taken free music streaming hostage. This is one reason why the major labels put their music on YouTube, Spotify's free music tier, and even went so far as to agree to Apple's initial "no pay" stance on Apple Music's three-month free trial. Ultimately, it is this desire for exposure on the part of labels that represents Apple Music's biggest headache as charging for music is made that much more difficult when music is free elsewhere. 

Free Music Streaming

Over the past few years, free music streaming has received a bad rap. Free music subscriptions have the potential to be attractive for both music artists and fans because artists gain valuable exposure while fans have access to a vast amount of music. However, there continues to be one major problem with free music subscriptions: ad-supported free music streaming simply does not provide enough revenue for musicians. There are very few alternative monetization techniques available for the average musician unable to tour or grab sponsorships. Meanwhile, paid music subscriptions, which Apple is betting on, remains niche with no evidence of mass market appeal given the presence of free music options elsewhere. It would seem that the music industry is in quite a predicament. 

In 2014, subscription streams income accounted for 23% of the music industry's $6.85 billion of digital music revenue. However, in an alarming sign of what is to come without significant industry change, ad-supported free music stream income, despite having 2.5x the number of users, accounted for only a third of the revenue from paid music subscriptions. The math just doesn't add up for free music streaming in its current form, despite its growing popularity. That doesn't mean that free music subscriptions should go away, but rather that more needs to be done to build other ways of valuing music. 

Meanwhile, YouTube remains the most popular option to access free music, with more than 1 billion users. According to the IFPI, approximately 27% of internet users listen to music on YouTube without watching the video. Despite having upwards of 10x the number of users compared to music subscription services, YouTube and other video platforms accounted for only $650 million of digital music revenue last year, less than half of the revenue attributed to subscription services. 

One positive sign is we are still in the very early stages of the music subscription era. The vast majority of people have not used music streaming. According to the IFPI, there were only 141 million active users for music subscription services at the end of 2014, of which 41 million were paying global subscribers. For perspective, there are approximately 475 million iPhone users out in the wild. Recent user surveys from Ipsos placed paid streaming usage at 16% while free streaming stood at 35% across 13 selected markets. This suggests that there is still time to come up with new and exciting ways of  building monetization into free music streaming.

Apple Music Pricing

Apple faces an uphill battle with Apple Music pricing largely as result of the music labels. Initially, it was reported that Apple wanted to price Apple Music at $5 per month to match the amount of money people spent on music in iTunes. The labels said no. Instead, with single memberships at $10 per month, Apple Music is priced in-line with other streaming services, offering full membership for $120 per year.

At first glance, Apple Music would appear to be dead on arrival given that price. However, there are a few other variables at play that will result in Apple Music having some life. While Apple was not able to get labels to agree to lower the price for single memberships, Eddy Cue was able to get the labels to come down in price to $15 per month for the family membership. Given that up to six people can be on the same iCloud account, Apple Music's family pricing will likely be much more popular than single memberships. 

In addition, it is important to remember that Spotify has 20 million subscribers paying $10 per month for its music streaming service. Since music streaming is still in the early innings, I suspect Apple will make inroads into this market, and it would be surprising if Apple cannot get more than 20 million people to sign up. The problem is that the upside to this number is limited by not having a free music streaming option. 

Apple is aware that entering the music subscription era without a free music tier is like entering a fist fight with both hands tied behind one's back. Accordingly, Apple has made certain aspects of Apple Music accessible to everyone. In terms of marketing, Apple's messaging continues to shift the focus away from music streaming (which is mostly a commodity these days) and instead towards playing up the idea of Apple Music as one service containing various ways of listening to music, curation and discovery led by music tastemakers, and interaction with your favorite artists. Said another way, Apple is trying to build music culture instead of being just a paid music steaming service. 

Apple's Long-Term Music Plan

Apple will pivot Apple Music to embrace free music streaming. However, any early success seen with family plans will not be lost. Evidence of a vibrant ecosystem and user base would be very appealing to music labels, which would agree to have their artists and catalogues included in a free music streaming tier on Apple Music. 

Music Culture/Discovery.  Apple is investing heavily in human discovery and curation by allowing tastemakers like Zane Lowe to represent the face of Apple Music. Beats 1 is positioned as a 24/7 radio station guided by one mission: play great music. The point of such a product is to build excitement, push music discovery, and introduce passion back into music. Having a host of DJs ranging from Drake to Elton John is meant to add personality to what has increasingly been algorithm-driven playlists and radio stations. There are many questions as to how one channel broadcasted across the world is going to work, especially considering all of the different tastes represented by the guest DJs. Nevertheless, much of this focus on music culture will remain a central theme of Apple Music regardless of price and whether Apple has a free music streaming tier.  

Connect. In what may the most interesting and intriguing aspect of Apple Music, Connect has the potential to be the very early stage of a fundamentally new kind of service that the music industry has never seen. Connect is a way for artists to connect with fans by sharing content such as pictures, short clips, and exclusive material. While the service has very subtle similarities to Apple's ill-fated Ping product, management has learned its lesson that the world doesn't need another social network. 

Connect may be so significant, it can represent the music industry's "App Store" moment. Connect can become the primary medium through which artists can monetize their art beyond music. Typically, the argument has been that artists can monetize free music through merchandising and touring. While for some that may work, the much more sustainable method would simply be to create a medium by which fans can support artists directly through either subscriptions or different access tiers. In the process, the definition of a musician changes. We soon can all become musicians with a route to monetization, even if we aren't professionals. Music is the art of expressing our emotion and views on the world. To think that the only people capable of making money from music are those that go on tour and sell t-shirts is missing the much bigger point. 

In a world where all music is free, Connect can be the way that artists sell subscriptions for complete access to the process behind their art. Videos, blogs, and other exclusive content can arguably be much more valuable than the actual music itself. In such a world, discoverability and the ability to reach hundreds of millions of users is critical because to find sustainability, an artist would only need to reach a very small group of loyal fans. Instead of 20% of the population paying $120/year for all the music they want, which primarily would go to the big labels and megastars, in this new world, 100% of the population can listen to all the music they want while supporting artists that they feel a connection to.

The theme behind all of this is decentralizing power from a few labels to everyone: 

• Music will be free. As a result, music artists can reach hundreds of millions, if not billions of users.
• Artists have access to information on their fans, making it easy to set up monetization efforts.
• Artists can rely on software to monetize their brand (image and personality) primarily through subscriptions and advertisements, but also through merchandising and sponsorships.
• New talent can transition from discovery to monetization quickly without many barriers.
• The definition of “music artist” becomes boarder to emphasize a wider range of content creators.

The problem with the current music industry structure is that it is difficult, if not impossible, to accomplish many of the preceding bullet points, especially without the support of a label. However, change is in the air. A music artist no longer needs to be sponsored by a Fortune 500 company, sell out the local sports arena, or have 10 million followers on social media to find sustainability. Instead, finding one's true fans and focusing attention on those individuals can lead to sustainability. In such an environment, the most difficult bullet point remains discoverability, which is conveniently one of the underlining themes found within Apple Music. 

Measuring Success

Success with Apple Music will change over time. At first, success will be judged by share of the paid music streaming market. The discussion will focus on Apple owning the "premium" music market, or those who are in a position to pay for music. Next, the discussion will focus on ecosystem strength, where the total number of users is paraded around, including those that just listen to Beats 1 and other radio channels. This is where the prospect of free music will be too hard to ignore. Meanwhile, Apple will work on expanding Apple Music's reach into other forms of music content, not to mention mind share. Apple would then introduce a new version of Connect where fans have the opportunity to buy the full experience from individual artists. All the while, the record labels will fight and drag their feet against these changes because they essentially are anti-label, giving most of the power to artists and fans. As Apple begins its new music journey, Apple Music has a future, but a few changes are needed to give the service widespread appeal and the ability to truly add sustainability back to the business of music. 

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