Apple Music, YouTube Red Mark a Momentous Week for Digital Music

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Apple Music has 6.5 million subscribers. YouTube announced its subscription service. Paid access just got a big boost.

The week of October 19 is the week digital music met its future. Long dominated by early entrants and standalone companies, the music subscription market was rocked by the world's two largest technology companies, Apple and Google.

Monday's news that Apple Music has 6.5 million subscribers and Wednesday's unveiling of YouTube Red, the company's upcoming subscription service, are two hugely important steps in helping, or properly enticing, consumers to make the transition from buying music to streaming for free to paying a monthly fee to access -- but not own outright -- a large collection of audio tracks and videos. If the jump from cassettes to CDs crossed over a hurdle, going from downloads to paid streaming requires scaling a 10-foot wall.

The industry has had trouble with that climb. There were 41 million subscribers to streaming services of all kinds at the end of 2014, according to the IFPI's Digital Music Report 2015. It's a number more appropriate for a few large markets than the entire planet.

Apple Music quickly became the second-largest music subscription with 6.5 million subscribers. Speculation was rampant leading up to September 30, the day the initial three-month free trial users would either become paying customers or cancel their subscriptions. Apple CEO Tim Cook had announced on August 6 that Apple Music had reached 11 million free trial users. But the question remained: would they stick around? Monday's announcement proved Apple built a service that connects with a great many people.

Getting 6.5 million subscribers isn't easy. Aside from Spotify, which had 20 million subscribers back in June (that number is due for an update), no other company has surpassed 4 million. Deezer claims to have 6.3 million subscribers, but gets revenue from only 3.8 million of them. Pandora, an Internet radio service that charges half the $10 charged by on-demand services, had 3 million at the end of June. Rhapsody, the elder statesman of subscription music, surpassed 3 million subscribers in July.  

What's more, no service has reached this level of subscribers so quickly. Spotify took over 4 years to reach 6 million. It should be noted that Spotify has effectively done the dirty work of introducing a business model to a broad audience (just as Rhapsody and Napster helped Spotify). But this is the genius of Apple's approach to launching products -- timing is everything. PDAs and feature phones prepared consumers for the iPhone. Clunky tablet computers preceded the sleek, powerful iPad. Apple may not be the first to market, but it often ends up being the best.

Not everybody was encouraged by Apple's announcement. Slate called 6.5 million subscribers "a slight disappointment" given the 94 million iPhones in the United States alone. USA Today emphasized the free trial users that Apple didn't convert into subscribers. Many commentators noted the distance between Apple Music and Spotify -- without mentioning Spotify launched in late 2008.

The same criticisms will undoubtedly plague YouTube Red. With over 1 billion users in more than 70 countries, it is the only service to match Apple Music's potential. If YouTube Red performs spectacularly and signs up, say, 25 million paying customers in its first few months, they would represent just 2.5 percent of its global audience. That a successful product would have the conversion rate of a targeted email campaign would confuse people to no end.

Another potential issue is YouTube Red's dual purpose. Subscribers will get access to not only music videos but also non-music content and original programming such as a sitcom series and full-length movies. Where is the line drawn? Any number of subscribers YouTube announces won't reflect the impact on the music industry. Their impact will be tracked and measured by the IFPI, RIAA and other record industry trade groups but will be grouped anonymously with the results of other subscription services.

Sandwiched between news from Apple and YouTube was a sold-out show by Tidal, the artist-owned subscription service launched by Jay Z following his acquisition of Swedish company Aspiro AB and its WiMP subscription service (which later took the Tidal brand). The company claims to have reached 1 million subscribers last month. Even counting WiMP's roughly 510,000 subscribers, signing up about 490,000 subscribers in six months is a great start for Tidal.

Tidal is different because it can do things few -- if any -- other streaming services can do. Concerts, for example. The Tidal X concert held at Barclays Center in Brooklyn featured a slew of chart-topping artists such as Jay Z, Beyonce, Nicki Minaj, Lil Wayne, Usher, Rick Ross, T.I. and Damien Marley. Billed as the first in a series of philanthropic music events, Tidal X showed a unique approach to branding and customer acquisition: if you hold a concert, they will come. To that end, the concert was live-streamed at in front of the pay wall and received an enormous amount of media coverage.

The point is not that Tidal X brought aboard new subscribers (although it probably did). And it's not that Tidal's exclusive content moves the needle (opinions are mixed). The point is Tidal, a artist-owned service intent to shift the power balance in streaming, is taking a different approach than its peers. It has star power and isn't afraid to use it. It has the same catalog and, for the most part, the same price points. But in a market with little differentiation -- even though services would argue otherwise -- Tidal is different

What happens to the other players in the streaming market? Pandora has such a solid business and early lead, not to mention it being a radio service that requires little of listeners, it should be the streaming service most immune from Apple, Google and Spotify. Slacker, primarily a radio service, could also suffer only minor damage. Saavn, an Indian music-focused subscription service, has a natural barrier because of its particular focus.

But other subscription services are more exposed than ever. Deezer, expecting to hold its IPO next week, derived 40.9 percent of its revenue-generating subscribers from its home market of France. It may need to follow the baseball creed "hit it where they ain't" and focus on markets likely to be overlooked by the major players (it already has a good presence in Latin America). The same goes for Rhapsody, Rdio (already available in India) and Simfy, who may get crowded out from the larger, more valuable markets.

It could be that the rising tide will lift all boats. But the success of Apple Music and YouTube Red might lift the water level, but some boats will take on water -- and eventually sink. Some carnage is to be expected when young markets mature.