If Streaming Music Kills Digital Downloads, Apple Must Make a Huge Decision

Steve Jobs argued that music fans would never subscribe for music.

However, the market may be singing a different tune and Apple (NASDAQ: AAPL  ) has a decision to make. U.S. digital album sales dropped 14.2% and digital track sales fell another 12.5% for the first quarter of 2014, according to Nielsen, following a 3.1% annual decline in 2013. This was the first time digital sales had declined on a yearly basis and even in the first quarter of 2013, downloads saw a nearly 4% gain before things went south. Unfortunately for Apple, this could signal a long-term trend change similar to what CDs experienced form 2007 to 2011, when sales began to decline over 18% a year. 

Streaming replacing downloading
On the flipside, digital interactive streaming revenue has leaped higher. Statistics from the Recording Industry Association of America (RIAA) revealed that services like Spotify, Pandora  (NYSE: P  ) , and YouTube brought in $1.4 billion in subscription, advertising, and licensing revenues in the U.S. in 2013, an eye-opening 39% increase from 2012 revenues. The International Federation of the Phonographic Industry (IFPI), which tracks worldwide sales, reported similar advances. Revenue from streaming music climbed 51% worldwide, while downloads declined 2.1%.

Also for Q1 of 2014, Nielsen BDS data showed music and video streaming came in at 34.28 billion streams in the first quarter of the year, up nearly 35% from 25.44 billion in Q1 2013. As streams have grown, revenue per stream has also increased. For the year, interactive streams averaged a $0.00375 payout per stream. According to industry sales tracking, 2,000 streams equal the wholesale cost of a digital download album ($7.50). In 2014, the figure is now $0.005, meaning 1,500 streams match the wholesale cost of an album.

Apple's dilemma 
These findings confirm what some in the music industry have predicted: Streaming services with their monthly all-you-can-listen-to subscriber fee are attracting more consumers and cutting into the sales of music downloads. Apple dominates digital music sales but lags behind music streamers, including Pandora and Spotify. 

The other factor in declining sales may be the growth of Google's  (NASDAQ: GOOG  ) Android OS. Although Android allows access to many iTunes apps from third-party developers, it offers its own Google apps for music, books, movies, and TV shows. 

Apple's huge decision
Will Apple risk upsetting the applecart by going after a larger piece of the market to offset declining download sales by offering an iTunes app for Android? In addition, should it initiate a subscription-based music streaming service that offers unlimited listening on a monthly basis?

In light of recent trends outlined here, those shifts in strategy would likely reinvigorate Apple investors and buoy its stock price. It may also alienate some of the hardcore Apple purist who don't want the company to sleep with the enemy, so to speak.

A pivotal moment
Whatever Apple decides, it will have a profound effect on the music industry. iTunes generates more than 40% of U.S. recorded music revenues and any shift in its business model will invariably adjust the business model of the music industry. 

A Fool jumps in
By offering an iTunes app for Android and launching a subscriber-based streaming service, Apple can significantly broaden its reach and increase revenues, or at least offset coming revenue declines caused by dropping digital sales.

Apparently, conversations about these changes are in the early stages, but Apple would be wise to take a proactive and not reactive stance. In a sense, Apple's iTunes  was the "cannibalizer" of CD sales and Apple investors should hope the company acts quickly to curtail the impact of declining digital sales, realizing Apple is now the hunted -- not the hunter. 

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