Can Beats Music Change the Tune at AT&T?

AT&T has agreed to subsidize Beats Music in an effort to keep more data subscribers.

Jan 21, 2014 at 11:00AM

AT&T (NYSE:T) wants you to sign up for the new Beats Music streaming service. The new service will compete with Pandora Media (NYSE:P), and AT&T has decided to give it a boost by allowing customers to pay for the premium music streaming service through their regular phone bill. What's more, Family Plan customers will be able to add up to five Beats accounts at a subsidized price of just $15.

AT&T's plans are clear: It wants to increase its subscribers data usage and charge them more for it. It's another ploy to prevent subscribers from moving to unlimited data plans at T-Mobile US (NASDAQ:TMUS) and Sprint (NYSE:S).

Source: Beats Music.

A big name partner for Beats
Beats Music launches on Tuesday, and will go head to head with Pandora and Spotify in the increasingly crowded streaming music space. Unlike the competitors, however, Beats is only offering a premium option with no ads.

Pandora offers a premium option, Pandora One, which costs just $4 per month or $36 per year compared to Beats and Spotify's prices of $10 per month. The Internet radio leader doesn't expect subscription revenue to make up a huge portion of total revenue, especially since it lifted its listening limit on mobile devices.

For Beats, the deal with AT&T gives it premier access to the wireless carriers 100 million-plus subscribers, which ought to help early adoption. Spotify offers a similar deal wherein wireless carriers can tack on its service to its subscribers' phone bills. The model has proven quite successful in the company's home country, Sweden, and Sprint markets the service in the U.S.

Moreover, AT&T has agreed to subsidize multiple accounts, providing a discount as high as 70% off. Not only does Beats get a strong brand to partner with and a pipeline to 100 million subscribers -- 50 million of which use smartphones -- but AT&T is going to make it less expensive for customers to try the service.

It's like a smartphone subsidy
AT&T is willing to offer such a high subsidy to its subscribers because it makes money selling its tiered data plans. Streaming music is bandwidth intensive, and AT&T figures it can move users of the Beats service to a higher data-cap. Charging for more data is the same reason wireless carriers subsidize smartphones.

The agreement with Beats is AT&T's latest act to counter T-Mobile's and Sprint's unlimited data offer. Although both carriers will throttle the speed down to their 2G networks after a certain limit, neither charges a fee for going over the limit like AT&T does.

T-Mobile and AT&T have both aggressively attacked the smartphone market lately. T-Mobile offered to pay for early termination fees for any carrier earlier this month, while AT&T made a counteroffer to consumers that anyone switching from T-Mobile could get up to $450 in credit for their phone bill. So far, T-Mobile appears to be winning the war, adding nearly 1 million subscribers in the fourth quarter while AT&T is treading water.

Streaming more customers
Although Beats Music is an unproven platform for music streaming, the brand has had tremendous success with its high-end headphones and portable speakers. It has a strong brand identity that AT&T can market to its subscribers. Whether or not it keeps them around, when are there are a plethora of free and premium music streaming options available, is another question.

AT&T plans to offer exclusive free trials of up to 90 days to get people hooked, and longer trials do tend to be more effective than shorter ones. As a result, Beats Music may see a quick uptake in the number of users similar to the sudden popularity of Apple's iTunes Radio when it was first released. Nonetheless, the product will have to live up to the hype. If it does, both Beats and AT&T stand to gain.

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