Dr Dre's New Service Threatens Apple and Pandora

Beats Music made its debut on Tuesday, launching on Apple's (NASDAQ: AAPL  ) iOS and Google's (NASDAQ: GOOGL  ) Android. The service, part of Dr Dre's Beats brand, is the latest in what has become a crowded market -- the list of subscription-based, on-demand streaming music services is long, and includes Spotify, Rdio and Google Music All Access, among others.

But early reviews of Beats Music have been positive; in particular, the app's unique recommendation system has been well-received. With Dr Dre's backing, Beats could emerge as a dominant service. If it does, it could take a toll on both Pandora (NYSE: P  ) and Apple.

Beats is a true competitor to Pandora
Pandora's management has claimed that other subscription music services are not true competitors. In some sense, they're right -- Pandora's focus is on delivering a great, curated listening experience and helping its users discover new music.

In contrast, a service like Google Music All Access or Spotify gives the subscriber access to a catalog of millions of songs on demand. Both Spotify and Google Music All Access have built-in song recommendation services, but as they aren't the primary focus of the service, they may not be as good as Pandora's.

But the same can't be said for Beats Music -- in fact, Beats' primary selling point is curation and discovery. New subscribers complete a survey about the genres of music and artists they like, then receive a personalized recommendation list. Taking it a step further, Beats Music offers playlists handpicked by music industry veterans, giving a human touch to its recommendations. In short, for those looking to discover new music, Beats Music is very much a Pandora competitor.

But will it steal many of Pandora's listeners? That's another question entirely -- unlike Pandora, Beats Music requires a monthly subscription, an obvious hurdle for many would-be listeners. Still, if Beats Music does take off, it should be seen as a bad sign for Pandora -- I can't imagine that many Beats subscribers would continue to use Pandora's service.

Apple's ecosystem depends on digital music sales
Apple's iTunes Radio is quite similar to Pandora, and thus, Beats Music presents the same sorts of competitive challenges. But Beats Music threatens Apple in a much bigger way.

Beats Music -- and the trend toward subscription-based music streaming services -- has the potential to weaken Apple's ecosystem. Apple investors, notably David Einhorn, have championed Apple's iTunes as a way to drive recurring purchases -- if you've spent a lot of money buying things on iTunes, you'll be naturally reluctant to give up your Apple-made smartphone or tablet.

But if you subscribe to a service like Beats, you won't have much reason to buy songs from iTunes. Indeed, there's evidence this trend is already playing out -- digital music declined for the first time ever last year.

Although Apple has seen other iTunes related revenue grow in recent quarters, music sales continue to make up the bulk of iTunes revenue (according to Asymco's Horace Dediu).

It's little wonder, then, that Google introduced its own music streaming service last year. In fact, Google is widely rumored to be working on a second music service that will work through YouTube rather than the Google Music app. Any subscription revenue these services bring in is likely to have little effect on Google's bottom line, but from a strategic perspective, the initiative makes sense -- the less iPhone users spend on iTunes music, the less dependent they are on Apple's platform.

Will Beats Music succeed?
I'm not sure if Beats Music will be a success -- it seems late to the game, and it's entering what's already a crowded market. Yet, the positive reviews are encouraging, and Dr Dre's larger Beats brand (via the Beats by Dre headphones) has become something of a cultural phenomenon.

If Beats Music does catch on, and attract millions of subscribers, it should be seen as a negative for Pandora and Apple.

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