Are Apple and Google About to Reshape the Future of Music Streaming?

Following Apple's acquisition of Beats Music and Google's planned acquisition of Songza, the music streaming industry finds itself at a crossroads with new possible top players on the horizon.

Jul 2, 2014 at 10:44AM

When headlines first erupted with speculation that Google (NASDAQ:GOOG)(NASDAQ:GOOGL) would acquire the music-streaming service Songza, the news shook the music-streaming industry, especially since it came on the heels of Apple's (NASDAQ:AAPL) acquisition of Beats Music.

Both of these music-streaming companies use a method of collecting, organizing, and delivering music that differs from other major companies in music streaming. While the two current music-streaming giants, Pandora (NYSE:P) and Spotify, use a carefully crafted algorithm to create playlists for their users, both Beats and Songza use playlists that are curated by humans.

Could this mean an evolution in the predominant method for creating music-streaming playlists? Will the listeners shift along with it? And will companies like Pandora and Spotify see a rapid loss of business?

How acquisition means massive expansion for music-streaming audiences
With Apple's acquisition, Beats lands an enormous and dedicated customer base. As of May, Beats had only 110,000 paid subscribers since its official release in January. As of early June, Apple had 800 million registered iTunes users.

Bloomberg reported in March 2014 that Beats Music signed up 1,000 subscribers a day in its first month, mostly during invitation-only alpha and beta testing. Also, out of the 750,000 potential subscribers who received 30-day and 90-day free trials starting Jan. 31, more than 70% converted to paid subscribers.

Comparing the current number of paid subscribers to this conversion rate, either Beats' conversion rates or number of free trial users -- or both -- appear to be dropping off. For Beats to become profitable, Recon Analytics estimated that the company would need at least 5 million paying subscribers, or about $600 million in revenue in a year.

Beats, which currently has a user base equal to .014% of Apple's, would need about 0.6% of Apple's current iTunes user base to convert into paid Beats customers to become a profitable company. Wide exposure on Apple devices, such as iPhones, iPads, and other growing product lines, like Apple TVs and the upcoming iWatch, could be huge for the Beats service.

Songza, which currently has 5.5 million active users, would see a similar surge in potential customers due to integration with Android devices, which currently have an even larger consumer base and market share than Apple.

With two music-streaming services being taken under the wings of two of the largest tech giants in the world, do other streaming services stand a chance?

What does this mean for current and future music-streaming services?
While Pandora runs on an algorithm, its music library was first built with human curation. Known as the Music Genome Project, experts analyzed music to label songs with nearly 400 distinct musical characteristics, also known as "genes," such as "West Coast rap roots" and "Cool jazz qualities."

After completing the analysis, experts organized songs by these musical traits, and they developed an algorithm that selects musically related songs, one after another. This creates a playlist based on an artist, song, or genre, as selected by one of Pandora's 75.3 million active users. Putting this algorithm into place is where human interaction ends. The actual human curation of the playlists is not a part of the end-user experience.

Beats and Songza, on the other hand, use hands-on human curation to create the playlists that users hear. Experts not only analyze and organize the songs by musical qualities, but they put the playlists together rather than letting a computer do it for them.

Because of this human curation, these two newer music-streaming services have also found a way to create playlists to match a user's mood or activity. Akin to creating mix tapes and CDs of the past, Beats and Songza can create these curated playlists in a way that Pandora and its algorithm cannot.

This curation technique and the trend of personalized playlists are becoming a force in the music-streaming industry as more users experience the customized playlists for themselves. If curated music-streaming services are presented en masse by tech giants such as Apple and Google, will this mean change for the industry's operations as a whole?

Profits are still but a dream
As of April, Pandora's revenue hit $194.3 million, which beat estimates, but it was still not enough to turn a profit. Spotify also consistently posts revenue losses, including $60 million in 2011 and $77 million in 2012. If neither Pandora nor Spotify can turn a profit yet, will they be able to stand tall against competition with such huge backers as Apple and Google? 

However, Beats Music has not been profitable, either, and Songza's revenue and profitability numbers are currently unavailable. But so far, just about all music-streaming services run off native advertising combined with an ad-free subscription-based service -- and this business model has not yet turned a profit for any of these services.

Will Apple, and potentially Google, be able to revamp this business model with improved marketing, operations, or any other support that companies of that size can provide? The future is cloudy at best, but it will be interesting to see what these tech giants can do for both the music-streaming industry and their own bottom lines.

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Carolyn Heneghan has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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