A key impediment to digital music growth has been Apple's avoidance of the music subscription model. That era officially came to an end Monday when Apple announced Apple Music, an overhaul of the Beats Music service it acquired last year and the company's successor to the groundbreaking iTunes Music Store.
Unfortunately, the introduction of Apple Music lacked a "wow" moment that would suggest Apple will push the subscription music market forward. The company tweaked, rather than reinvented the existing subscription product. Regardless of the on-stage bluster, Apple Music follows familiar formulas established by its predecessors. The safe course might end up being the best course, but there should be little doubt Apple hasn't taken an ambitious tack.
Wall Street investors showed a typical knee-jerk reaction. Shares of Pandora, an Internet radio service that barely swims in the same pool as Apple Music, dropped 4 percent Monday and fell another 5.2 percent in Tuesday morning trading, although it had recovered slightly by midday. RealNetworks, part owner of subscription service Rhapsody, fell 3.6 percent on Monday.
Morgan Stanley analysts had a more tempered reaction. In a note released Tuesday, the analysts called Apple Music "a more robust pay service" than its competitors. The note argued Apple Pay "clearly packs more value" into the subscription model by adding such features as Beats 1 (a global radio service that introduces on-air personalities into a model that has avoided all association with traditional radio) usability through Siri (Apple's voice recognition and search service), music videos and integration with consumers' Apple purchase history. Apple's family-plan pricing $14.99 for up to six people (more generous than competing services' family plans) adds additional value.
But Morgan Stanley doesn't believe Apple Music will drive paid subscriptions to "mass-market ubiquity." The company conducted a survey earlier this year that revealed roughly 30 percent of respondents showed interest in paid music services, and only one-third of that group (or roughly 10 percent of all respondents) showed interest in a $10-per-month price. Russ Crupnick of MusicWatch puts the ceiling on the U.S. music subscription market at 35 million people. His figure is far from mass-market ubiquity, but about three times greater than current U.S. subscriptions.
Combined with the popularity and high customer satisfaction of free music services, this lack of interest in paid music services led the analysts to believe "free music will drive the lion's share of audio consumption over the long-term." In addition, Morgan Stanley believes digital streaming advertising will grow faster than digital subscription revenues. In other words, Apple doesn't appear to have created either a Spotify killer or a Pandora killer.
The deeper meaning of Monday's announcement could be the shift in Apple's approach to digital media. For years Apple stood firmly against subscription music, and now it's playing catch-up to Spotify and other services. It lags behind Netflix in paid video streaming, if it ever enters the streaming video race. Its launch of the News app followed a less-than-sterling Newsstand rollout, as well as similar app Flipboard by some years. A FBR Capital Markets analyst called streaming music "the top of the iceberg for Apple" and predicted the company will announce a television subscription service later this year.
In all fairness, Apple could have had grander ambitions. Subscription music products are only as progressive as rights holders allow. New features could be rolled out over time. Until that happens, Apple will need some brute force to make subscription music succeed. Spotify doesn't have hundreds of millions of existing customers. Tidal can't market itself inside physical retail stores in 16 countries on five continents. Rhapsody didn't have global revenue of nearly $183 billion last year. Apple may not have the best product, but it has the most resources -- more than any company in the world, actually.