Category Archives: Music

Parsing Spotify’s Financials

Spotify recently filed its annual report with regulators in Luxembourg, where the company is registered. The full annual report isn’t available online, but there’s enough data in various articles to put together a reasonable picture of its financials. As the poster child of streaming music (and its largest beneficiary), Spotify’s financials are illustrative of the state of streaming music overall, and so it’s worth looking closely at them to discern trends.

If this topic is of interest, you should also listen to a recent episode of the Beyond Devices Podcast, in which I interviewed Ryan Wright, the CMO of Kobalt, a music startup which is streamlining the process of getting payments from services like Spotify to labels and artists. We discussed Spotify specifically during the episode, and Ryan had an interesting take on the free/paid split. You may also find this column I wrote for Variety on the RIAA’s recent annual report interesting.

Massive growth

We already knew to expect massive revenue growth, given Spotify’s periodic updates on subscriber numbers, but the financials certainly bear this trend out powerfully. The chart below shows annual revenues, and you can clearly see the much bigger jump in 2015, relative to any previous year:Spotify revenue growthThe interesting thing here, of course, is that 2015 is also the year Apple Music launched. Far from putting a dampener on Spotify’s growth, Apple Music seems to have accelerated it, if anything. More likely, the streaming music industry has simply reached a tipping point, and both the Apple Music launch and Spotify’s success in 2015 are symptoms of that common cause.

Worsening losses

With all that growth, and the increasing scale that comes with it, one might expect that Spotify would be inching closer to profitability. However, that wasn’t the case, as it actually went backwards in 2015, in that both operating and net losses grew rather than shrinking (though margins were up slightly):Spotify marginsThe company still loses money, and one of the biggest reasons is that the vast majority of its revenue goes straight to paying the labels for the music it streams. And, instead of that number falling as a percentage of revenues, it’s risen for the last two years:Spotify royalty costs as percent of revenueThat’s problematic, because it means that if Spotify is ever to make money, it has to squeeze its other costs harder to generate a profit. Interestingly, though Spotify has often said that labels get a roughly 70% cut of its revenues from streaming, this contribution is much higher – in the mid 80s. That appears to be because Spotify has a whole set of complex and interrelated agreements with labels to pay minimum amounts regardless of usage, and as such its actual payouts are higher than that standard 70% cut in at least some cases.

The good news is that Spotify’s other cost lines are shrinking as a percentage of revenue, even as they grow in real terms. Personnel costs were just 13% of revenues in 2015, down from 18% three years earlier, but external consulting fees were still 2.5% of revenues in 2015, while advertising and PR made up another 4.5%. Given that Spotify only has about 16 points of gross margin to work with to begin with, it needs to start getting some of these items quite a bit lower to generate profits. The good news is that there have been other individual markets (mostly in Europe) where Spotify has become profitable over time, and so there’s a precedent for profits following scale on a more local level.

Paid versus free streaming

The other interesting aspect of Spotify’s results is the split in its revenue sources, among which paid subscriptions and advertising account for over 99%. The split between those two has remained relatively constant over the last three years, with subscribers generating roughly 90% of revenue, and advertising the other 10%. That’s notable, because Spotify has over two times as many free subscribers as paid subscribers, but those paid subscribers generate nine times as much revenue. To look at it another way, the paid subscribers generate roughly 80 euros a year in revenue each, while the free subscribers generate just $3-4.

This has been a matter of some controversy within the music industry, but in that podcast episode I referred to earlier, we discussed this, and Ryan Wright’s take was that the existence of free streaming is actually important from a perspective of creating a funnel for future paid subscribers. Given that Spotify consistently has around one third paid subscribers, there’s some evidence that this funnel generates the desired results over time, but in the meantime there are many more subscribers generating vastly less revenue. It’s arguably critical both for Spotify and the broader music industry that this conversion of free subscribers continues, and the fact that Spotify reduced its price for family plans today to bring them in line with both Apple and Google is likely another attempt to boost this strategy.

Spotify dominates industry paid streaming revenue

The other interesting thing about this revenue is how it compares to overall industry revenue from both paid and ad-supported streaming. The IFPI is the global body representing the music industry, and its annual reports provide estimates of global revenue from streaming. This year, it broke out paid and ad-supported streaming specifically, and it’s worth comparing Spotify’s figures to those overall industry numbers. In order to compare these figures on a like-for-like basis, I’ve apportioned Spotify’s royalty costs on the same basis as its revenues between paid subscriptions and advertising, and compared those numbers with the IFPI’s industry revenue figures. On that basis, then, let’s look first at Spotify’s paid streaming revenue as a percentage of the IFPI’s industry revenue figure for this category:Spotify as percent of IFPI paid streaming revenueThe obvious conclusion is that Spotify’s growth is not just in line with industry growth but actually represents a significant gain in share of the total paid streaming market. On this basis, it’s clear that Spotify dominates overall paid streaming revenue for the industry (as it does subscriber numbers).

On free streaming, Spotify is the minority

The other interesting comparison is looking at Spotify’s ad-supported streaming revenue versus the number reported this year by the IFPI. The IFPI pegged ad-based streaming revenue at $634 million globally, which translates to 566 Euros based on today’s exchange rate. Spotify’s ad-based royalty payments were of the order of 164 million Euros, which translates to about a third of total industry revenues. In other words, its share of ad-supported streaming is a minority one, far from being dominant as it is in paid streaming. And that, of course, makes perfect sense when you consider YouTube’s role in ad-supported streaming. YouTube is likely far more dominant in usage on the free streaming side than Spotify is on the paid streaming side, but it pays out at a much lower rate, so its share of revenue is not as dramatic as its share of usage.

Useful context for an IPO

These numbers certainly make for interesting reading, and I’d love to get my hands on the full filing, because there are additional numbers in these documents which would be great fodder for additional analysis. However, even just with what I was able to glean from secondary sources, there’s plenty here to put Spotify’s rumored IPO plans in context. The company is growing fast, and dominates the paid streaming market. For investors looking to buy into the streaming trend, this looks like a great bet. Of course, the downside is that the company has yet to generate profits on a global basis, and it doesn’t look any closer to that milestone this year than last year. That’s something investors will want to look at very closely if and when Spotify does file to go public.

Apple Music survey results

Related: Apple topic page, all Apple Music posts.

The three-month anniversary of the launch of Apple Music passed at the end of September, which means many of the early trial users have been faced with the decision of whether to become paying customers or to cancel the service. As such, I though it was a good time to run some surveys to ascertain who’s using Apple Music, why, and how. The full results of the two surveys I ran in early October, along with detailed methodologies, can be found in a new Jackdaw Research report, which you can download for free here.

In this post, I’m going to focus on just one of the two surveys (which was run through the MicroHero survey app), and specifically address several theories I had put forward in an April Techpinions column. Those theories were:

  1. Apple’s service, like all other paid music, would be most popular among older demographic segments
  2. Discovery would be an important element of the service, and as such those who thought discovery was important would likely gravitate toward the service in higher numbers than those who didn’t
  3. The integration of users’ owned music libraries was likely to be a key feature too, and as such Apple Music would do well among people who valued this feature.

The MicroHero survey had 500 respondents, which is good for a margin of error of about 4 percentage points, but I’m not claiming that the specific percentages I’ll share below are necessarily representative of the general population. As such, you should focus on the trends and patterns shown below rather than the specific percentages.

 Age patterns

With regard to the age breakdown, there were two interesting findings: younger users were more likely to have tried Apple Music than older users, but older users were more likely to have become paying customers when their trials ended. The charts below illustrate these two findings:MicroHero trial signup by ageFirst off, as you can see, the older users were, the less likely they were to have tried Apple Music – rates were about twice as high for the youngest age group as for the oldest, with some ups and downs in-between. This shouldn’t be surprising, as younger users are typically more tech-savvy, more aware of new trends, are bigger users of music streaming services in general, and so on.

However, when looking at those who did trial Apple Music, older users were far more likely than younger users to have converted their trials to paid subscriptions:MicroHero sub status by ageAs you can see, the percentages here are virtually reversed, with the under 35 age group canceling at roughly the same rate as the 35+ age group became paying subscribers. Again, this shouldn’t be too surprising, even though it’s a reversal of the age pattern for trials. Older listeners have always spent more on music than younger listeners, who tend to have less disposable income and more time on their hands, often giving them a higher tolerance for the disadvantages associated with free music (whether bootleg concert tapes, recording songs off the radio, or listening to music with frequent ad interruptions, depending on the era).

The importance of discovery

One of the early questions in both surveys asked respondents to rank various features of music streaming services in order of importance. Discovering new music wasn’t the top-rated feature, but for those respondents that did rank discovery as highly important, the rate of conversion to paid Apple Music subscriptions was higher than the average. The chart below shows how this group compared to the overall base of respondents on their conversion to paid subscriptions:MicroHero Discovery conversionAs you can see, the rate of conversion for those who prioritized discovery was similar to the rate of conversion for the 35+ age group we saw above, and significantly higher than the average. This is a great validation of Apple’s strategy to promote discovery as an important feature of Apple Music, which seems to have paid off well.

Owned music integration less important than expected

Conversely, users who said the integration of their own music into a music service was very important didn’t appear to favor paid subscriptions at a different rate from the rest of the respondents, contrary to my theory from April. However, when I asked respondents who had decided to become paid subscribers why they did so, integration of their own music was something over 50% of them said was a significant factor. Below are the results for this question from the second survey, which was run through Qualtrics:Qualtrics features likedAs you can see, two other features actually ranked higher than the integration of owned music – the integration of Apple Music within iOS (through features such as Siri), and discovering new music. As such, my hunch that owned music integration would be important was borne out somewhat, but not as strongly as my theories about age and discovery.

These and quite a few other findings are outlined in more detail in the report, which features 23 charts in total, relating not just to Apple Music in particular but music consumption habits in general. Again, you can download the report for free here.

Apple Music first day review

Since Apple broke its usual rule of giving reviewers plenty of time to review its new products with the Apple Music launch, giving reviewers just a single day to review the service, I thought I’d break my own rule and do a review of my own based on my first day with the service.

Exactly the app I wanted

First off, the new Music app is just the app I’d wanted and hoped that Apple would eventually launch. I’ve always wanted to just be able to combine the music I already have in iTunes with new music I add from subscription services, but that’s always meant two apps in the past. Now it’s a single app, and Apple made this work just the way it should – “My Music” now means the combination of my library and the stuff I’ve added from the subscription service, seamlessly together in one place. I love this aspect of the service, and it immediately puts it head and shoulders above any other service by itself. The app itself is quick, responsive, not too glitchy (with some exceptions in the iPad version, in my experience today), and I found the layout perfectly logical and easy to follow. I’m increasingly convinced that reviewers calling Apple’s recent products and services “complicated” really mean that they’re very feature rich for v1 products, which I don’t see as a bad thing. By the same token, the iPhone is complicated, but I don’t think anyone calls it that.

As a result of all this, we’ll be discontinuing our other music services more or less immediately, once we’ve recreated a small number of playlists of favorite songs in Apple Music, something I largely completed today, which was very straightforward. I opted for the family plan on Apple Music, which means I’m finally headed for my first experience with Family Sharing. I haven’t heard great things about it from others who’ve worked with it, so I’m approaching this with a bit of trepidation, but hoping it works out OK.

Beats 1 is not for me – at least for now

One of the things I’ve been most interested in ahead of time was Beats 1, and exactly how it would work. We finally have a decent sense of the lineup, and today we got our first taste of Zane Lowe and his unique DJing style. I listened to Beats 1 for the first half hour or so, but found the genre-hopping jarring. Within those first 30 minutes, Zane Lowe played a bewildering mix of old and new material, genres as diverse as metal, rap, and pop, and it just reminded me why I’ve largely stopped listening to the radio in a world with digital music. My tastes in music are at the same time eclectic (I like many genres) and narrow (I tend to like just a few artists within each genre), which makes me a tough customer for this kind of thing (more on this later). I just didn’t like 90% of what I heard on Beats 1, and it gave me a headache. It also felt like Apple was working a bit too hard to promote its exclusives (Pharrell, Taylor Swift, AC/DC etc) and the service itself and Zane Lowe wasn’t free enough to be himself, so I hope that changes as the service goes on.

For You and personalized curation is better

I found the For You section and the personalized curation much more effective in my case, though I found my initial experience with the interest selection as frustrating as I had on Beats (which largely supplied the experience). The jiggling circles from which you choose first genres and then specific artists are fun visually but somewhat annoying to use in practice – as you choose items, they tend to crowd out other options that appear, and you end up choosing a variety of things that you kind of like because they’re the best options available, but they then make it harder to choose others. I think the best description for the genre I listen to most frequently is probably “singer-songwriter” but it’s not even in that initial list of genres, and many of my favorite artists never came up. As such, what I’ve told Apple Music I like is a weird mix of my second and third favorites rather than a true list of artists I really like.

Having said that, once I put a bit more work into this effort, selecting more of those artists with several taps of the “more artists” button, the recommendations For You provided started to get better. I’ve found several tracks I quite like that way already. As such, I think I’ll like this more personalized form of curation more enjoyable than the  generic stuff in Beats 1.

 

Absence of desktop iTunes was bizarre

The weirdest thing about the launch was the things that went wrong – the total absence of updated versions of iTunes for hours after iOS 8.4 became available being the most obvious thing. This meant that the social sharing elements didn’t work at all on devices other than iPhones, with lots of broken links and error messages. It was a bizarre omission and I can only think Apple did it to avoid overloading its servers or something. But it took the shine of the service for anyone who doesn’t own an iPhone or wasn’t able to update their software today for whatever reason. The other odd thing was the hour of music and other stuff Beats 1 played before its official debut at 9am ET, which included Zane Lowe testing his mic and chatting with people in his studio, which was an awkward reminder of the stuff in the New York Times piece about how his equipment wasn’t working in the studio when the reporters were there. Everything seemed to be working fine when the show finally started, but it was another element that seemed to lack polish.

Connect looks really promising

One element I know there’s been a lot of skepticism about is Connect, which is reminiscent of Ping for many people. However, I think this is one of the areas of greatest promise, and one of several things that has the potential to set the service apart from competitors. The content there today is fairly limited, though it’s an interesting mix of polished video, candid snapshots and half-finished material, and even tweet-like text content. The content has lots of shares and quite a few comments, many of them welcoming both the service and their favorite artists’ engagement with it, which bodes well. But we need to see a lot more content from a lot more artists on a regular basis for this to work, so that’s something we’ll have to keep an eye on. As a social platform, though, it already looks vastly better than Ping.

A good start with some polish needed

Although I felt that the lack of polish and the glaring absence of the new version of iTunes detracted from the launch, the app itself is fantastic, and I’m totally sold on it. It’ll easily replace my existing options and do it much better than they ever could, and that’s really what this needs to be. Apple should easily win converts from Spotify with the service, but the bigger question remains whether it can make new customers for paid music streaming. After three months of using this service for free, I suspect many users will find it tough to give up, and that’s another major element in what I think will ultimately be a successful launch. Of course, that also means we won’t see any real positive sign of Apple Music in Apple’s financials until it reports earnings in January 2016 (since the first trial users won’t convert until the very end of September or early October). Ironically, what we may well see before then is a sharper drop off in the already falling music sales on iTunes, so the first impact may be negative rather than positive, especially as Apple is now paying out royalties during the free trials.

Apple Music’s other financial advantage

This is something I’ve though about quite a bit, and even wrote about briefly as part of a much longer piece ahead of the launch of Apple Music, but I feel like no-one is really talking about. But it’s potentially quite significant for the economics of Apple Music, and especially the per-stream payout rate Apple will end up passing on to labels and artists. Note: it’s already clear that Apple will have a higher per-stream payout simply based on the fact that it’s a paid-only service, whereas Spotify and other large services mix paid and free users. But I’m talking about an additional impact on top of that.

Integration of owned music is the key

The big factor here is Apple’s integration of the music you already own and store in iTunes into the Apple Music experience and into a single app. I think that’s huge for usability, and that was the key point in that earlier piece, but I think it could also be quite significant for the economics of the service. Why is that? Well, with almost any other subscription streaming service, you as the user tend to start from scratch in terms of your existing library. Perhaps you hop back and forth between apps when you play the music you own versus the music you’re streaming, but I’d guess many people just stick to a single app and play all their music from there, even the stuff they may have purchased somewhere along the way, because it’s all available in the streaming service and it’s easier to play it there than switch apps. Services like Spotify will pay out to artists regardless of whether the user already owns the track somewhere else (unless the user has imported their owned music). But when the user’s owned music is also available in the app, Apple won’t have to pay out when the user plays that music.

What’s really hard to know here is the balance between owned versus streamed music the average user plays during the course of a typical month. I know my own usage is heavily skewed towards the music I own and am familiar with, along with a few tracks or albums I don’t own and stream instead. Perhaps others are different, but I’d guess almost all users would spend a significant amount of time playing music they already own. With other services, the provider still has to pay out on this music because it all looks the same, but with Apple Music there will be a clear line between the music the subscriber owns and the music he or she is streaming through the service (even if it’s presented together in the context of the app). If the amount that’s played from the library rather than streamed is significant, this could substantially reduce the number of plays for which payments need to be made.

A higher per-stream rate on Apple Music

At this point, it’s worth thinking about how the economics of streaming music work. Although we often see per-stream rates used in discussions of how much artists get paid through these services, the reality is that there are no set per-stream rates. Rather, these services share some proportion of their overall revenue from subscribers and/or advertisers with those labels and artists whose music their subscribers listen to. The total pot is divided up with labels and artists according to a standard formula, and I’ve pasted the graphic Spotify uses to illustrate this formula below:

Spotify-Royalty-Formula

Once you understand that it’s a matter of dividing up the total pot, it becomes very relevant how many songs are streamed and therefore get to share in that pot. If Apple Music has fewer songs streamed through the service (because a significant proportion are played instead from users’ libraries), that in turn could dramatically increase the per-stream payout for those artists whose music is streamed. That will likely disproportionately benefit new artists and music over older artists and albums, which could be particularly good for those discovered through the service.

Of course, over time, this advantage will be mitigated as the balance between owned and streamed music shifts towards streamed music, as people will likely buy far less music (if any) going forward. But as the first Apple Music subscribers get past their trial periods and Apple starts paying out on its long-term formula, this could result in significantly higher payments per stream than other services. Add this to the existing advantage Apple has over competing services because of the paid-only nature of the service. Over time, that could have a really interesting impact on artists’ willingness to continue to work with other services. If, as an artist, you’re getting paid several times more on Apple Music per stream than on Spotify, Rdio, or Deezer, would you eventually consider pulling at least some of your music from those other services?

Note: I’m making a fundamental assumption here, which is that Apple will only pay out on plays of music the user doesn’t play from his or her own library. That seems a reasonable assumption, but I haven’t confirmed it. I can’t see why Apple would pay out on that music (unless it’s played through iTunes Match, which shares 70% with artists too), but it’s a remote possibility that it will, in which case the argument falls apart. 

Some thoughts on Apple’s Beats 1 DJs

For the Beyond Devices podcast last week (embedded at the bottom of this post), we discussed Apple’s content-focused announcements from WWDC, including Apple Music. For our Question of the Week (a regular feature), we discussed one specific element of the Music service, and that was the three DJs Apple hired for Beats 1. We discussed that for probably 10-15 minutes (it starts around 20:25 in the episode), but I thought I’d quickly share some of the key points here.

Apple has hired three DJs for Beats 1 (so far):

  • Zane Lowe, who comes from BBC Radio 1, and is the figurehead of the service, and by Apple’s implication pulled in the other two
  • Ebro Darden, from New York’s Hot97, a mostly hip hop station, where he was until about a year ago the station director, and where he has been presenting the morning show
  • Julie Adenuga, from RinseFM in London, the least experienced and well known of the three.

I’ll talk about each in turn below, and then share some general thoughts about these DJs and their significance.

Zane Lowe – Global (LA)

Zane Lowe will be the voice of the global station, and this is the last of a series of transitions that’s seen him go from growing up in New Zealand to working in a record shop in London’s Notting Hill to hosting a show on XFM in London, to BBC’s national Radio 1 station, to arguably the first mainstream global radio station at Beats 1. Zane Lowe has a unique style as a DJ, though it was frustratingly difficult in my research to find examples of him broadcasting (ironically, because BBC iPlayer provides a great legitimate source of rebroadcasts, but yanks them after a month or so, and Lowe stopped broadcasting in March). He tends to talk over tracks, react vocally to things, and generally make lots of noise. Above all, he’s an enthusiast about music – not a critic for criticism’s sake, but someone who genuinely loves music and wants to share the best stuff with other people. That’s also made him something of a tastemaker, helping new acts break into the public consciousness – that’s important, and something I’ll come back to below.

Lowe is also a performer in his own right as a DJ, and has contributed producing and writing talent to other artists, which earned him a Grammy nomination for his work on Sam Smith’s breakthrough album. He’s brought some interesting segments to his Radio 1 show in the past, including doing deep dives on classic albums, playing the whole thing through and discussion it and related topics on his show – it’d be very interesting to see him do something similar on Beats 1, though I’m sure he’s got plenty of other ideas. He’s also done lots of interviews with high profile artists including Kanye West, Jay-Z, Chris Martin, and Eminem. Above all, Zane Lowe is a mainstream, top 40 music kind of guy, covering all the popular genres without going deep on any of them. Radio 1 is the BBC’s youth-oriented popular music station, and that’s very much his role at Beats 1 too.

Ebro Darden (New York)

Ebro Darden is another very experienced DJ, but one who’s much more narrowly focused on a specific genre, hip hop, rather than covering the breadth of stuff Zane Lowe covers. Hot97 is one of the major hip hop stations in the world, and as such he and his fellow DJs have become some of the arbiters of what’s good and even what counts as “real” hip hop (see this Radiolab episode for a fascinating discussion of one of Darden’s colleagues at Hot 97, a Jewish guy called Peter Rosenberg who’s nonetheless one of the major influencers in the hip hop world, somewhat controversially). So even though Apple positions Ebro Darden as covering the New York music scene, I suspect he’s actually going to be covering mostly that genre, a subset of the stuff Lowe will play.

Darden is also a more controversial figure, willing to mix it up with artists and others on Twitter and elsewhere, calling them out on their false claims to hip hop credibility and such, which makes him a more controversial figure than Zane Lowe, and one who’s willing to call out things he doesn’t see as kosher. Again, though, he’s a tastemaker as well as just spinning discs people already know and love.

Julie Adenuga (London)

Julie Adenuga is to my mind the most interesting and surprising of the three: she’s far less well known than the others, she’s a lot younger (mid 20s rather than early 40s), and has a lot less experience as a DJ. She’s a fascinating choice in that way. She’s also much more like Ebro Darden than Zane Lowe, in that she’s associated with a particular genre of music, broadly speaking a certain brand of London club music, but more specifically the Grime genre, which is a sort of evolution of the UK flavor of garage music (both styles combine electronica with rap-style vocals). She has two brothers who are prominent grime musicians in London too, so there’s some family credibility in that particular genre in addition to her own self-made success as an up-and-coming DJ on Rinse FM, a former pirate radio station that went legitimate around the same time she joined a few years back.

She’s got a fun personality both on the radio and in videos I came across during my research, and my favorite quote from my research was “Her drive time Rinse FM show became scientifically proven as the only thing that could make you smile on your way home on a London bus”. That should make her a fun DJ on Beats 1, too. Like Zane Lowe, she’s done lots of interviews with popular artists both on the show and elsewhere, and I wonder if she’ll bring some of that to Beats 1 too.

General thoughts

What really stood out to me with all three of these DJs is that they’re not just figureheads, but tastemakers, defining tastes and breaking new artists in a way no algorithm ever could. Though Spotify, SoundCloud, and the like have undoubtedly helped break some new artists, it’s largely the social element and the users that have made that happen, not the curation or recommendations from the services themselves. Beats 1’s DJs could therefore add an interesting new angle, not just helping you discover stuff you don’t know about that others do, but helping to bring new artists to the world for the first time as well.

Another big question in my mind is exactly how Beats 1 will be structured – with just three DJs, it can hardly be a 24/7 radio station, so how will Apple fill the remaining air time? How often will each of these DJs “broadcast” and to what extent will this be a live experience or a pre-recorded thing more like a podcast that you listen to when it’s convenient? And although there are three DJs already, it’s clear that there’s plenty of music out there that these three wouldn’t cover, notably jazz, classical, and even many other sub-genres of the mainstream stuff Zane Lowe covers, with just two genres covered by Darden and Adenuga for now. It’ll be interesting to watch this set of DJs evolve over time and to watch also how Apple will package all this up into a radio station.

It’s also fascinating to watch Apple building a radio station, when traditional radio stations (including Zane Lowe’s former employer Radio 1) are evolving their branding and position beyond the traditional radio model and towards YouTube, Snapchat and other media in addition to radio itself. Apple, of course, has many other music related offerings beyond Beats 1, including Apple Music and its new Connect service, but in some ways Apple is moving against the stream (no pun intended) at the moment. It’s worth noting that even Spotify is moving into video.

At any rate, if you want to listen to us discussing all this on the podcast from last week, you can do so using the embed below, or go straight to the website to see this and other episodes as well as links to iTunes, Overcast, and so on for adding the podcast to your podcast app of choice.

Expanding Apple services on non-Apple devices

A few months back, I wrote this piece which talked among other things about why Apple doesn’t make most of its services available on third-party devices. The basic argument can be summed up in this quote from that piece:

When the whole rationale for Apple’s software is to add value to its hardware products, the idea of providing cross-platform software or services becomes inimical. To the extent that Apple software or services are available on non-Apple devices, they cease to provide meaningful differentiation for Apple products.

However, Apple has continued to make some services available on third party devices, and I see potential for more of this in future. I definitely don’t see Apple abandoning the strategy I outlined in that post, but I do see potential for them to broaden the range of what they provide on non-Apple devices, so in this piece I’m going to argue the other side of that earlier piece.

The iPhone and Mac installed bases

The key to all this is to understand the difference between the iPhone and Mac installed bases. The iPhone is now in every way Apple’s lead product – it accounts for half to two thirds of total revenue in any given quarter and the lion’s share of profits. And it’s also the Apple product with by far the largest installed base. Let’s look at the numbers quickly:

  • iPhone: around 450 million users
  • iPad: around 200 million users
  • Mac: around 80 million users.

We’ve leave the iPad to one side and focus on the iPhone and Mac. What this leaves us with is a world where there’s only very partial overlap between iPhone users and Mac users, with the vast majority of iPhone users likely owning or using Windows PCs rather than Macs, if they use a PC at all:

Mac iPhone and Windows basesApple has done a great deal over the past couple of years to better serve Mac + iPhone users (including those who also have iPads), including various iCloud features, and the Handoff and Continuity concepts and their associated feature sets announced at last year’s WWDC. All this makes owning more than one Apple device better than owning just one, because the devices you have work better together. The Apple Watch extends this even further, and deepens the attractiveness of an all-Apple ecosystem.

300 million Windows + iPhone users

However, there are still several hundred million iPhone users who don’t own or use Macs on a daily basis, many of whom do use Windows PCs, either by choice or because work, cost constraints, or other reasons require them to. This Windows + iPhone group is actually substantially bigger than the Mac + iPhone group Apple has spent so much time serving, probably around three hundred million or more:
Windows plus iPhone diagramIn an ideal world, Apple would have these Windows + iPhone users become Mac + iPhone users over time, but that isn’t a realistic scenario for a variety of reasons, especially in the short term. So, how does Apple serve these users?

iTunes on Windows and beyond

Well, the answer began with the launch of iTunes on Windows in 2003, two years after the original launch on the Mac, in an attempt to create a market for the iPod larger than the base of Mac users. With the launch of the iPhone, Apple piggybacked off this iTunes installed base as a way to make that product, too, Windows compatible. Since that time, Apple has introduced a few other pieces of installable software for Windows PCs, but much of its effort in supporting Windows users recently has been in the form of web apps rather than native software:Apple software on WindowsiCloud Drive is the only new product Apple has introduced for Windows recently, and it builds on earlier versions of the iCloud product for Windows, which enables some of the extensions and add-ons shown in the middle column in the table above too. But Apple has now made a fairly wide range of products and services available on the web, at iCloud.com, as shown in that third column. These serve the Windows+iPhone reasonably well for some use cases, though I can’t imagine as a Windows user wanting to use the web versions of the iWork suite as my main productivity apps.

What’s missing?

At this point, it’s worth asking what else Apple needs to do to make its products available on third party devices, and whether it’s likely to do so. Here’s a short list of potential next steps:

  • A web version of Maps
  • iTunes on Android devices
  • The Apple music subscription service on Android
  • Messages on Windows and/or Android
  • The iLife apps on Windows and/or Android
  • iBooks on Windows and Android.

There may be one or two other gaps, but I think that about covers it. Which of these seem most likely at this point? The diagram below shows my estimate of the likelihood of each of these things happening:3rd party apps next stepsIf Apple hadn’t acquired Beats in order to build a subscription music service, I would have put the likelihood of Apple’s music service landing on Android much lower than I have, but since Tim Cook has already signaled that Beats will remain on Android, it seems a fairly sure bet that the successor will be there too. I don’t quite understand the strategic rationale here – almost anything on Android seems to fly in the face of Steve Jobs’ quote in the Walter Isaacson book:

We put iTunes on Windows in order to sell more iPods. But I don’t see an advantage of putting our music app on Android, except to make Android users happy. And I don’t want to make Android users happy.

The only real explanation I can see (beyond maintaining the status quo ante with Beats) is that Apple is competing head-on here against existing subscription music services, all of which are available cross-platform, so this is a concession to reality. But it still feels odd.

Maps on the web seem very likely to me – Google’s web maps were a fantastic hook for Android when it arrived, because it allowed people to make a seamless transition from the product they used on the web for planning, figuring out a route and so on to the one they used on their smartphone for actually navigating from A to B. The fact that Apple doesn’t have a Maps option for anyone using a Windows PC means that those users are far more likely to use other mapping services both on the web and on their phones, or to have disconnected experiences on those two devices. Apple has posted job listings several times (including one that was noticed today) indicating that it might be looking to bring its Maps app to the web, and this seems eminently believable. I’m only putting this slightly lower than the subscription service on Android because that seems largely a foregone conclusion, whereas Apple seems to have been toying with the idea of a web maps app for some time without pulling the trigger.

Essentially everything else I listed seems significantly less likely to happen, although if the music subscription service lands on Android it might make sense to make the full iTunes experience available on Android too. iBooks makes little sense as a cross-platform product – people don’t read many books on their PCs in comparison to tablets and smartphones, while porting iLife would be a huge effort and significantly undercut one of the differentiators of the Mac. Messages was actually the specific focus of the earlier post I referred to at the outset of this one, and I outlined there the reasons I can’t see that happening. It feels like the archetypical example of Apple’s own-devices-only strategy, and it’s also uniquely mobile-first among all these products.

We’ll know more next week

I’m writing this the week before WWDC, where I expect that at the very least we’ll see the music subscription service launch and know whether it will indeed land on Android in either its full or a watered down form. But we’ll likely also get more clues about how Apple sees the opportunity beyond its own devices, and whether the current set of products and services for the Windows + iPhone crowd represents the outer limits of how far Apple is willing to go to keep them happy.

Quick Thoughts: Apple and shutting down Beats

There are reports today that Apple is planning to “shutter” the Beats Music service, which seem to be causing consternation, surprise, and comparisons to Google’s acquisition and subsequent dumping of Motorola. As I see it, there are a couple of different ways of interpreting the news, and although one of them would indeed be shocking, the other is entirely predictable, and that’s the way we should be interpreting this.

Two ways to interpret the news – one is clearly wrong

The first way to interpret this is that Apple is shuttering the Beats Music service as it currently exists in order to replace it with an Apple and/or iTunes-branded replacement using Apple’s delivery technology, label relationships and so on rather than those developed by Beats. This was an entirely predictable development and one which everyone should have been expecting from the beginning. Why would Apple acquire a product like this and simply let it continue as it is without either wrapping it into the Apple fold, slapping an Apple brand on it and integrating it with the broader Apple ecosystem? Especially when Beats Music wasn’t a massive hit with consumers in its current form? The Beats Music service only makes sense as an acquisition in the context of the broader iTunes service, which lacks an on-demand subscription option without it.

The second way to interpret this news is that Apple is shutting down the service entirely without any plans to replace or integrate it into iTunes, and that seems to be how many people are interpreting it. The reports from Re/code and others seem to be refuting this interpretation, though without much detail behind the refutation. But under this interpretation of events you’d see the Beats Music service shuttered at midnight one night, never to be seen again, and with no replacement lined up from Apple. That’s patently incredibly unlikely, especially given Apple’s assurances at the time of the acquisition.

What does the Beats replacement look like?

What, then, is likely to replace Beats when it is wound down and/or wrapped into iTunes proper? I see several elements:

  • it fills the on-demand subscription service hole in iTunes, possibly with subscription and ad-supported elements (though I think the latter is unlikely given both Apple and Iovine’s insistence that music command a proper price)
  • it incorporates some recommendation and curation elements from Beats Music
  • it introduces a new format, as alluded to in U2’s recent interviews, which adds more to the classic album format than just the music.

There will almost certainly be some sort of migration path and/or grandfathering in of the smallish number of existing Beats Music customers.

Timing – “one more thing” in October?

When might we see this new service make its debut? I’d argue pretty soon, especially given today’s reports. It might make a good “one more thing” at Apple’s October event, if that happens. It would also nicely reintroduce a music theme to Apple’s fall events which has been missing since the iPod began playing second fiddle to the iPhone and iPad.

Beats was never about one thing

As I wrote in my original Apple/Beats post, the Beats acquisition was never about just one thing. Rather, it combined the headphones business, the music subscription business and the relationships and expertise of Jimmy Iovine and Dr Dre in one package. As such, the comparison to Google’s acquisition of Motorola may perhaps be apt in that Google got significantly more than just Motorola’s handset business when it bought it (including patents and the set-top-box business sold shortly after the acquisition). The Beats Music service in its broadest sense – the customers, the service, the technology and expertise behind it – was just one part of that acquisition. Of that, only the service as it currently stands, arguably the least-valuable part of that package, will go away. All the rest – inasmuch as it’s valuable – will be incorporated into what Apple ends up launching off the back of it. And then there’s the headphone business, which is both a lucrative business in its own right and potentially a jumping-off point for new products from Apple under both the Beats and Apple brands. As such, these reports – even if true – are the furthest thing from an admission of failure of the Beats acquisition imaginable.