Business Matters: Apple & Beats, In Search of the Ultimate Bundle

A year or two from now, when the music subscription business will surely have been transformed further by dealmaking and consolidation, the acquisition of Beats Electronics by Apple may be viewed as the turning point in the story of how the sector matured. The $3.2 billion deal, reportedly near completion but still not done, would represent the moment when the world’s richest tech company finally decided that access to music will be more important to consumers than owning music -- and may be the trigger for a faceoff among some of the world’s biggest tech companies to capture the music subscription market.

Until recently, subscription services have been viewed broadly as a niche business for music enthusiasts. Perhaps tens of millions of people worldwide pay for a music subscription today -- a tiny fraction of Apple’s 800 million iTunes account holders, or the 1.7 billion smartphones estimated to be in use by the end of 2014. For now, the subscription market is dominated by music-specific services: Spotify, Rhapsody, and Muve may be the only three that boast more than a million paying customers worldwide, while competitors Rdio and Beats likely have just hundreds of thousands.

Big tech companies have largely watched and waited. Google introduced Google Play Music, a cloud-based music locker/streaming service combo, in fall 2011, but it hasn’t gained much traction. Instead, the search giant is thought to be readying a subscription service based on YouTube, which already outdistances all others in terms of the overall amount of streaming music delivered to consumers. Meanwhile, Amazon.com is negotiating licenses with music labels that would allow it to bundle a music service with Prime, its membership club that receives free two-day shipping on purchases, on-demand streaming of selected videos, and a lending library of Kindle books.

These diversified tech companies aren’t music specialists at all. They’re behemoths that court mainstream consumers of every stripe, far beyond the tech enthusiasts who profess fandom of their approaches, although all of them already view music as an essential piece of the way they engage with consumers. If they do indeed break into the subscription market, they’ll be trying to sell music subscriptions to people who don’t know Nickelback from Quarterflash, or YG from Y&T. And they’ll be aiming to do it by selling them something else: a phone, an operating system for a phone, headphones, or a discount on shipping costs for when they need toothbrushes or light bulbs, with music as part of the package.

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Some observers have speculated that the price of music subscriptions, at roughly $10 a month for most consumers, is still too high. One way tech companies can survive cutting prices is to hide the cost in a bundle, so that people who don’t particularly want the service -- who were unlikely to subscribe to Beats or Spotify -- pay for it anyway, on the way to getting something else. Standalone music specialists would have a hard time doing this; some are finally seeing traction from hard-won bundling partnerships -- most recently, Spotify’s tie-up with Sprint. But big tech companies that draw hundreds of dollars from many millions of regular buyers every year? It’s much easier for them. (Muve, it’s worth noting, owes its success to years of bundling with wireless carrier Cricket, now under AT&T’s ownership. The latter company is -- or was -- believed to be preparing to unload Muve in favor of a newer relationship with Beats.)

For Apple, Beats may have been especially attractive for another bundling proposition -- its hardware business. If reports are accurate that Beats Music had signed up only 100,000 to 200,000 customers in its first few months of existence, most of the purchase price was for a headphone and portable speaker business that brought in more than $1 billion annually, thanks in part to its powerful brand name and association with co-founder Dr. Dre. Apple is already rumored to be interested in wearable technology, another opportunity for bundling beyond smartphones. With unlimited music, smartphones, headphones, portable speakers, and maybe a watch or something else in play, Apple/Beats may be the ultimate bundling deal.

So if the deal doesn’t fall through, maybe the takeout of Beats will be the lightning bolt that makes music subscriptions into a truly mainstream business, when we stop wondering whether Rdio can compete against Spotify to capture the hearts of music fans, and start thinking about how Apple, Google and Amazon will be able to outmaneuver each other to capture the mainstream consumer’s music dollar. Standalone services might still persist, especially to serve serious listeners, but even those among us who know the differences between Future, Islands, and Future Islands might find themselves paying Big Tech for music every month, every year, or every new phone. Whether we’re trying to or not.