Beats Music's First 100 Days: A Bumpy Start

Illustration by Louise Pomeroy

As Spotify allies with Sprint, labels say Jimmy Iovine and Dr. Dre's streaming service is off to a slow start.

This article was first published in the April 26th issue of Billboard Magazine.

Two of music's most successful brand marketers, Jimmy Iovine and Dr. Dre, are in the hot seat as label sources grouse that the first 100 days of the duo's subscription streaming service, Beats Music, has been a disappointment and soon will face competition on the mobile platform when Sprint begins bundling Spotify with its "Framily" plans.

Spotify founder Daniel Ek will debut the rival wireless partnership -- a direct challenge to Beats Music's alliance with AT&T -- on April 29, at a time when a number of label sources are expressing concerns that Beats, which launched in January, has yet to catch fire in the streaming music market.

"Jimmy is finding out this is tougher than it looks," says one senior executive. "This business takes time."

Beats Music was started by Iovine and Dre with backing led by Warner Music Group owner Len Blavatnik in a $60 million funding round a year ago. The music service is in the process of closing a new round valued between $60 and $100 million.

Although the labels remain supportive of Beats Music for the long term, these sources estimate early subscriber numbers as "disappointing" despite a marketing launch valued in the "tens of millions of dollars." (Beats has not released subscriber numbers, but labels have gauged use by its revenue impact.) The push included a splashy Ellen DeGeneres Super Bowl TV ad and the lucrative mobile phone bundling partnership with AT&T, the No. 2 wireless carrier in the United States, which has 110 million mobile customers. Sprint, the No. 3 carrier, has 54 million, which should put Spotify at a competitive disadvantage.

The key metric for the labels is the so-called "conversion rate" -- the rate at which free trials to road-test a streaming service lead to paying subscribers. Label sources estimate the Beats Music subscriber count to be in the "low six figures." Beats representatives declined to comment for this story, but company insiders argue that subscriptions and consumer reaction has met expectations and that the "millions of people" trying out the service exceeded internal projections.

Some label sources say Beats Music should scrap its original advertising-led approach and give away more free music. "We've learned from Spotify that you have to fund free for a length of time with users investing time, creating playlists and getting used to the service," says one senior executive.

Spotify has just over 2 million subscribers in the United States, according to people familiar with the company's data. They point out that it took two-and-a-half years of educating the U.S. market and giving away millions of dollars' worth of music for subscribers to reach that number.

Despite their concerns, label executives predict the tipping point for the subscription streaming business is near now that two of the largest mobile phone carriers are bundling Beats Music and Spotify subscription fees, at a discount, into customers' bills -- which, they contend, is an easier hurdle than having users sign up for automatic billing through the streaming site. They also say they are excited the streaming services will benefit from their wireless phone partners' huge marketing budgets. Kantar Media reported that last year, AT&T spent $1.8 billion on marketing, while Sprint spent $765 million.

The music streaming business grew 33% in the first quarter to, Billboard estimates, $171 million, while music download sales fell 13% to an estimated $473 million.

The labels not only want more entrants to boost the market size. They also want more competition so they're not beholden to a dominant market leader like Apple's iTunes, which has as much as a 70 percent share of U.S. digital music revenue.

Music industry insiders widely acknowledge that Beats Music is still young and has plenty of runway to match expectations. Some label executives also contend that Iovine and Dre's success at building Beats Electronics into a world-class brand in just five years created unrealistic expectations for their streaming service.

"We are rooting for them," says one.

Additional reporting by Ed Christman