Music has always been a big business for Apple (NASDAQ:AAPL). In creating iTunes and the iPod in the early 2000s, Apple was doing more than making a gadget -- it became the guardian of consumers' prized music collections. The iPod wasn't the first portable MP3 player, but it provided a superior user experience with its trademark white color and circular navigation wheel. Apple integrated the iPod tightly with iTunes and its macOS software, creating a music ecosystem.
Music remained important at Apple with the 2014 acquisition of Beats Electronics, a headphone company, which brought with it music talent Dr. Dre and hit-making record producer Jimmy Iovine. At that time, Iovine praised Apple's "unmatched ability to marry culture and technology."
That acquisition also included the Beats streaming music service, which became Apple Music, making Apple a force in streaming. Apple Music now boasts over 50 million subscribers. At the time, Apple was again a late entrant behind first-mover Spotify (NYSE:SPOT). But Apple has been gaining on Spotify recently, nearly matching Spotify's subscriber count in the U.S.
The next potential phase of the music-tech industry tie-up involves a challenge to the big record labels. To that end, Apple just made another hire through an acquisition (though a much smaller one than Beats), bringing on the founders of a start-up called Asaii to help bolster its new publishing venture.
Threatening old-school labels
To understand the Asaii acquisition, one has to understand why and how Spotify and Apple are getting into publishing. Last year, Spotify quietly began signing small, independent artists to direct licensing deals. The move essentially cuts out the all-powerful triumvirate of labels in the music industry: Universal, Sony, and Warner Music. Though the dollars are small at this stage, it could mark the beginning of something bigger. Right now, Spotify is going after artists not yet on a label, including up-and-coming unknowns and older artists who have regained rights to their music.
This is not unlike the strategy Netflix used in its initial growth phase. When Netflix had distribution but no content of its own, it licensed older shows, signed "older" talent such as Adam Sandler, and then eventually created its own shows. By methodically growing content, Netflix eventually disrupted many studios and cable channels.
The similarities between Spotify/Apple and Netflix involve distribution and data. With huge scale, these platforms can collect and analyze huge reams of data. Netflix took that data and used it to create massively successful shows. Can Spotify (and now Apple) use data to sign artists who might have gone overlooked by major labels?
Apple gets in the game
In May, Apple was reported to have created an internal music publishing division, following Spotify's efforts. The project is said to have been one of the first initiatives of new Apple Music director Oliver Schusser, who took over in April after Iovine left the company. That music-publishing division, to be headed by iTunes legal director Elena Segal, was reported to be aimed more at songwriters than artists.
And Apple has now made another move, paying up for the talents of Asaii founders Sony Theakanath, Austin Chen, and Chris Zhang. Since it's likely these three might perform functions at Apple that are similar to what they did before, Asaii's services could give a glimpse into Apple's musical ambitions.
Asaii was founded as an AI-powered company to enable music labels to find the next big artist. By analyzing data from multiple platforms (not just Apple or Spotify), Asaii touted its almost superhuman capabilities in artists and repertoire, the part of music publishing dedicated to discovering and developing new talent.
One snippet from its website says: "Artists recommended that are on this page are guaranteed to hit a chart within 10 weeks to a year. Our algorithms are able to find the next Justin Bieber, before anyone else." Whether you like Justin Bieber or not, you can't argue with sales, so this kind of software, if it works as advertised, could be a big deal.
Apparently, Apple thinks there's something here. Details of the acquisition weren't given, only that the price was "less than $100 million." Quite pricey for three employees!
A new music industry
Both artists and distributors curiously don't make much profit from music sales. As such, both ends are looking to take back some of the pie from the oligopoly of the major labels. Apple's new acquisition (with the Asaii founders who come with it) shows it's joining Spotify in those efforts, with a helping hand from big data and artificial intelligence. This data-driven disruption is going on in just about every industry, and the story still appears to be in the very early chapters for music. So don't touch that dial -- there's more to come!
Billy Duberstein owns shares of Apple and Netflix. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.