Two things stand out in Apple’s announcement Sunday it will pay independent creators for 90-day trials. First, the preceding controversy was entirely predictable. Second, the end result was arguably predictable, too.
A quick back story: Apple’s initial licensing contract to independent labels and publishers would not have paid rights holders and creators for streams originating from the service’s 90-day free trial period, which begins on June 30. As Apple svp Eddy Cue told Billboard, the company intended to pay rights holders by paying a higher royalty to compensate for the temporary loss of income.
As one would expect, the independent community has been inflexible since receiving a proposed contract for Apple Music. A2IM encouraged its members to delay signing the contract. The Beggars Group as well as independent music groups in the United Kingdom, Canada, Germany and Australia publicly expressed displeasure their displeasure with Apple’s offer.
One might wonder why Apple, as savvy a company as exists, failed to anticipate music industry backlash over its proposed deal. One might also wonder why a company renowned for its negotiating skill so quickly admitted defeat on this particular deal point.
But perhaps this controversy is not what it seems. Another possible explanation comes from Sun Tzu’s The Art of War: all warfare is based on deception.
Apple was likely to foresee the controversy that would arise. This requires no special insight into the independent music community. This is the same group of rights owners that banded together to create Merlin, an independent rights organization, so independents could negotiate licenses with the leverage of a major music company. Many independent artists, namely Thom Yorke and David Byrne, have waged public relations campaigns against streaming services deemed not to support the people that create the music.
It should have anticipated that its contract — or at least the terms for the 90-day free trial — would leak to the media. Rights owners, managers, artists and trade groups routinely utilize the media to raise awareness and comment on the licensing contracts of digital services. Recall that an independent label contract for iTunes Radio leaked before its launch in 2013. Earlier this year, Sony’s 2011 contract with Spotify leaked, generating significant attention and controversy. Numerous independent artists, from Zoe Keating to David Lowery, have published details of their streaming royalties on their blogs.
If the controversy was foreseeable, the outcome must also have been foreseeable: Apple would end up paying rights holders for streams during 90-day free trial periods. This brings up an obvious question: why would Apple court controversy if the outcome were entirely predictable?
One plausible theory is Apple was engaging in an act of game theory. By drawing attention to the 90-day free trial, Apple could have diverted rights holders’ attention from other deal points (such as advances or minimum revenue guarantees). When Apple agreed to pay during the free trials, rights holders would feel they had gained a concession. In reality, Apple never expected to win that deal point.
If this theory seems far-fetched, consider the alternative: Apple believed it wouldn’t pay royalties on (likely) tens of millions of free trials, didn’t anticipate a strong backlash, ended up conceding a major deal point, and, after agreeing to drop the deal point, said it would keep long-term royalties at their original level of 71.5 percent of revenue. That’s a lot of missteps for such a successful company.
There’s another wrinkle. Whether purposefully (more believable) or not (less believable), Apple’s acquiescence to independent rights owners could end up harming its competitors. Not only will Apple pay 71.5-percent of revenue to rights holders — greater than the standard 70 percent — it has also established a new precedent regarding free on-demand streaming. Apple’s original terms placed zero value on free listening. Agreeing to pay for free trials helps establish a value on that free listening. As a result, this could encourage rights holders to demand more from ad-supported listening (such as Spotify) and free trials or bundled (with telecom accounts) services elsewhere.
It was also likely to have expected rights holders to demand more. Taking the first offer is a failure to negotiate. It’s like negotiating the purchase of a car; the initial offer should anticipate a higher counteroffer and should be lower than your take-home price. Instead, the two parties proceed in a gave-and-take until an agreeable outcome is reached. Simply put, the first offer should not be the final offer. As such, independent rights owners should have been expected to want better than the first offer.
The Taylor Swift event seems to have been an unanticipated but pleasant surprise. Industry reaction had since peaked by the time Swift wrote her Tumblr post, which quickly gathered international attention. It turned out to be a perfect moment to capitulate to the demands of the creative community, one that ensured Apple would regain the aura of a creators’ champion that it has earned over the last 12 years. And given the timing of Swift’s post, Apple would appear to have a change of heart on a slow Sunday — Father’s Day, no less — rather than a news-filled weekday.
However Apple got to this point, one can’t deny the value of the resulting press attention. “Apple gets PR boost from Swift scolding,” trumpets a USA Today headline. Indeed it did.