Apple's (NASDAQ: AAPL ) decision to acquire Beats looks great in the face of declining digital music sales. A recent report from Nielsen reveals that music downloads continue to wane -- compared to the first six months of last year, digital track sales are down 13%.
Nielsen singled out on-demand streaming services as a key factor in the decline of digital downloads. Adding Beats (and its subscription-based music service) should help Apple compete in that arena, as it continues to fend off competition from devices powered by Google's (NASDAQ: GOOG ) (NASDAQ: GOOGL ) Android operating system.
Steve Jobs was wrong
Apple's founder Steve Jobs was never big on subscription-based music services. Famously, in a 2003 interview with Rolling Stone, he called the subscription-based music model "bankrupt" and noted the shockingly low subscriber counts of the then major streaming music services.
But that was long before Spotify, and years before the iPhone. The growth of Internet-connected mobile devices (many of them made by Apple) has made the subscription music business viable, and increasingly, dominant. Spotify now boasts 10 million paying subscribers, nearly double from last year.
Nielsen called out on-demand streaming services specifically as helping to spur the decline of the digital music download business, noting that on-demand streaming song plays were up 42% through the first six months of the year (compared to 2013).
Can Beats replace iTunes?
Beats Music has only a fraction of Spotify's subscribers, but under Apple's management, it could quickly grow its share of the market. Likely because of its deep integration with Apple's devices, iTunes Radio now accounts for about 8% of the streaming music market, up from nothing last year.
As on-demand streaming rises in popularity, Beats subscription service could offset, or perhaps even replace, Apple's iTunes business.
The importance of the ecosystem
But shifting from digital downloads to streaming presents some problems in terms of Apple's ecosystem. Although it's possible to bring music tracks purchased from iTunes over to a device powered by Google's Android, it isn't easy. Someone with a large iTunes collection, then, is at least in theory, more likely to stay among Apple's most loyal customers. Hedge fund manager David Einhorn has used this argument to partially justify his investment in the firm.
Subscription services, however, challenge this notion. Indeed, one of their most attractive features is that they work across multiple devices -- music collections exist in the cloud, and are not tied to any one particular device.
A customer that subscribes to Beats Music, rather than buy individual songs from Apple's iTunes, is more agile in terms of the devices they can own, both now and in the future. A customer that may have stayed with Apple's iPhone because of their large iTunes collection can switch to handset running Google's Android, losing nothing in the process.
Apple needs more exclusive deals
For the time being, Apple's executives have said they will keep Beats Music on other platforms, including Google's Android, but it wouldn't be surprising if Apple eventually reneges, or uses its Beats assets to create an iOS-exclusive, or iOS-favored, streaming service.
Apple could bolster that service with exclusive content. Last year, it made a deal with Beyoncé to offer access to her self-titled album ahead of its competitors. Billboard reported in February that Apple was in tense talks with music labels to create similar deals, perhaps in an effort to keep major songs out of the hands of streaming services.
But with its ownership of Beats, Apple can embrace the streaming future. Although it remains to be seen how Apple will utilize the service, its ownership gives it far more flexibility. In a world moving toward subscription-based streaming, Apple is no longer tied to a dying business model.
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