United States / Analyst Insights
Apple Enters the Music Streaming Space
by IBISWorld
Jun 09 2015

During its annual Worldwide Developers Conference on Monday, June 8, Apple announced the release of Apple Music, a new music streaming service intended to increase the tech giant’s presence in the growing market for subscription-based music delivery. Over the past several years, Apple has been wary of entering the realm of music streaming due to the company’s, as well as late CEO Steve Jobs’, long-held philosophy that the subscription-based model cannot succeed since it does not satisfy consumers’ inherent desire to “own their own music.” Under the subscription-based model, which has grown increasingly popular through music services such as Spotify, Pandora, Google Play and Amazon Prime Music, consumers who pay a monthly subscription fee are granted access to a virtually unlimited library of musical content that can be streamed anywhere and stored on their home computers, tablets and mobile devices for on-demand listening on a ‘rental’ basis. As a result, Apple’s entry into the subscription-based music services industry merely reinforces current music sector trends, as opposed to creating the revolutionary change the company is known for.

Impact

With the announcement of the new competing service, Apple appears to have formally distanced itself from its once hard-lined opposition to this business model. As a result, Apple Music and the many competing streaming music services stand to further erode the profit margins of major music labels, as per-play song royalty payments remain miniscule in comparison with the royalty payments awarded after the physical and digital sales of music. The $7.6-billion Major Label Music Production industry experienced 3.8% revenue decline last year and industry profit margins fell from 7.0% in 2010 to a projected 5.8% in 2015 as a result of this growing popularity of music-streaming services. However, despite the decline in profit, music labels have had no choice but to embrace streaming and digital music in general, with digital sales accounting for about 48.0% of the industry revenue.

musicMajor Label Music Production Industry’s Products and Services

Shrinking royalty payments to labels and copyright holders have ultimately translated to proportional reductions in payments awarded to the singers and songwriters This does not necessarily mean that the growing popularity of subscription-based music services comes at the detriment of performers. In fact, both aspiring artists and massive acts alike benefit from the added exposure that stems from streaming music. Major artists will likely continue to use Apple Music and other services to increase their exposure to casual listeners who may otherwise never wish to purchase music from these artists, while artists with smaller followings will find the streaming platform to be free of the barriers that once prevented them from reaching out to potential new listeners. On the other hand, because of lower royalties associated with streaming songs, artists will have to rely more on the volume of streams in order to generate a healthy income, which is a difficult task for new artists. Moreover, as streaming services become more popular, musicians will have to increasingly depend on tours to generate their incomes. IBISWorld estimates that performers in the Musical Groups and Artists industry will generate 35.9% of their income from live performances, while only 7.7% will come from royalties.

music artists productsMusical Groups and Artist Industry’s Products and Services

Outlook

Apple Music’s entry to the market for online subscription music services is anticipated to uniformly benefit consumers of music. Those who do not often purchase music will be more likely to use the streaming platform’s unlimited structure to discover new artists without needing to purchase physical albums and without prior knowledge of the artist’s work. How Apple’s new service will affect publishers and musicians in the long term, however, is uncertain. Apple’s massive ecosystem of iTunes, iTunes Radio, the iTunes App Store and the millions of iPhone users across the US could potentially steer a significant number of Spotify users toward Apple Music. If Apple can successfully generate substantial market share for subscription-based music services, the company will possess far more leverage with which it may be able to negotiate even slimmer royalty rates from publishers. However, considering the public’s tepid support for iTunes Radio, Apple’s 2013 response to internet radio playlist services such as Spotify and last.fm, it is not yet clear if the company’s new streaming service will be able to gain significant market share.