Apple's acquisition of Beats shows that it is serious about its music-streaming business
By C.S-W.
WHEN Apple bought Beats, a music firm founded by Dr Dre, a rapper, for $3 billion a year ago, some wags looked askance at the deal. Best known for making garishly colourful headphones, the business looked like a dud investment for the world's biggest tech firm. But a year on, the deal is starting to look smarter. Apple was not interested in the firm's headphones business. The tech giant instead wanted Beats’ music-streaming service, which it now plans to relaunch as its own at its Worldwide Developers Conference in early June.
Although Apple has started to throw serious money at Beats, the streaming-music sector is still not that big. Except in Scandinavia, only a small percentage of the population subscribe to other music-streaming providers, such as Spotify. And the sum of their subscription fees only came to $1.57 billion last year, according to the IFPI, the industry's trade association.
Neither is it particularly profitable. “All the services operate on negative margins,” according to Mark Mulligan of Midia Research, a consultancy firm. Theoretically, operating margins of 5% to 6% are possible in the music streaming business, Mr Mulligan says. But that would involve spending nothing at all on marketing the services to new customers, which is unsustainable in a fiercely competitive market.
Apple's new service, when it goes live, could easily overtake its rivals, because it has a huge advantage when it comes to distribution. At the push of a button, Apple could install its streaming app on hundreds of millions of iPhones and other devices in the Apple ecosystem, an option that competitors such as Spotify do not have. Apple can also cross-subsidise the service through its other revenue streams. For instance, it could earn back the money it may lose on music streaming by getting more consumers to buy iPhones.
That may look like a good strategy on paper. But it is also fraught with danger. Last month, the European Commission launched legal action against Googleon anti-trust charges for allegedly abusing its market power on the firm's internet-search ecosystem. To avoid a similar fate at the hands of regulators, Apple will need to step carefully when it releases its new service in June.
