AT&T’s proposed $1.2 billion acquisition of Leap Wireless International, which includes the popular Muve Music service, doesn’t appear to be hanging up the carrier’s discussions for a distribution deal with other music services, including Beats Music, according to sources familiar with the talks.
The No. 2 U.S. wireless operator is considering a branded tiered strategy that would see Cricket’s Muve Music marketed to less affluent, prepaid subscribers, while Beats Music would target customers willing to pay a premium for their phone package. Executives knowledgeable with the discussions caution that no agreements have been reached, and that “all the carriers are talking to all the music services.”
Carriers have been exploring the economics of bundling deals as a way to attract and retain customers. Many have monitored Muve and its ability to help Cricket reduce churn, which in turn reduces user acquisition costs.
Muve currently has 1.7 million paying users, making it one of the largest on-demand music services in the country alongside Spotify and Rhapsody.
Softbank, which is acquiring the nation’s third-largest wireless operator, Sprint, had also put in a rejected $8.5 billion bid for Universal Music Group (see story, page 10), suggesting how telecommunications companies can leverage content, especially music, to differentiate.
AT&T and Beats Music declined to comment. Leap Wireless spokesman Greg Lund says, “It’s business as usual for Cricket and Muve until the deal closes.”
AT&T has said it expects to close the transaction in six to nine months. Beats Music, founded by Interscope Geffen A&M chairman/CEO Jimmy Iovine with funding from Access Industries, has said it plans to launch late this year. The Santa Monica, Calif., company started to ramp up its hiring of engineers in late July to begin building the service, which is expected to offer a different take on music curation, thanks to Beats creative chief and Nine Inch Nails frontman Trent Reznor.
For music services, the key negotiating factor for any carrier distribution deal is the cost of free trial periods. While free trials lasting a month or more are seen as an effective means of garnering paying subscribers, music services still must pay royalties for every song played during the trial. As a result, the three main stakeholders—carriers, music services and rights owners—have been discussing ways to craft a solution that could spread the cost and the risk of any distribution deals among the parties involved, sources told Billboard.
One proposal is for carriers to guarantee a minimum number of paying subscribers, giving them incentives to push the music service at the sales level. Another is to have rights holders consider two-tiered licensing with a lower rate for free trial use and a higher rate for paid subscriptions.
“If there’s a chance that carrier distribution can get music services to the mainstream, then there’s an incentive for everyone at the table to get the economics right,” says a music executive who declined to be named because he was not authorized to speak publicly on the matter.
Because such deals are still in their early stages, AT&T and Beats could sign a short-term, one-year deal to see how things play out, the executive says. Doing so wouldn’t necessarily close any options for either party. AT&T and Beats already enjoy a close retail relationship. The carrier’s stores stock Beats Electronics audio gear. And Beats returns the love by giving AT&T product exclusives.