Although technically a Spotify competitor, Beats Music was far from threatening when it debuted earlier this year. With a unique element of personal curation, it wasn't just a me-too product, but its $10 per month on-demand music model is almost indistinguishable from Spotify's. Technical glitches plagued its launch, and in May, a leaked document suggested that Beats Music had only 111,000 paying subscribers -- a drop in the bucket compared to Spotify's 10 million.
But in spite of its massive lead, Beats Music could eventually catch up to its much more entrenched competitor. Apple's (NASDAQ:AAPL) acquisition is already benefiting Beats Music, and further advantages seem likely to accrue in the months ahead.
Beats Music comes to Apple TV
Late last month, Apple updated Apple TV with a new channel: Beats Music. Though known mostly for its streaming video and cord-cutting prowess, since the beginning, music has been an integral part of Apple TV, and for years, Apple TV has served as an ideal way to play iTunes music over a home theater setup.
But digital downloads are waning in popularity and subscription-based services are on the rise. In July, Nielsen reported that, for the first six months of 2014, digital track sales declined 13% on an annual basis. Meanwhile, on-demand streaming rose 42%.
The addition of Beats Music to Apple TV makes it the only on-demand streaming service with a native Apple TV app. Admittedly, Spotify music can be sent to an Apple TV, but only with a paired Mac or iOS device using AirPlay. That's a solution, but it's not ideal -- the use of AirPlay limits what that paired device can do. For Apple TV users -- of which there are at least 20 million -- the integration with Beats Music could entice a few Spotify subscribers to jump ship.
Closing Beats Music down?
But more significant is what the addition suggests -- Apple is using its ownership of the platform to give Beats Music a leg up over Spotify. That seems likely to intensify, particularly as Apple works to further integrate Beats Music within its iOS platform.
Late last month, a report from TechCrunch alleged that Apple planned to discontinue the Beats Music service at some point in the near future. Apple later denied the report, but Re/code elaborated: Though Apple may discontinue the Beats Music brand, it would remain active in streaming music, perhaps merging Beats Music with its own iTunes application.
Spotify's rivals have a big advantage
If so, that would be similar to what Google has done with Google Music All Access: For $10 per month, owners of devices powered by Android can give the core Google Music app Spotify-like functionality.
Not all of Spotify's users rely on iOS or Android devices, but its most lucrative do: Although Spotify is ad-supported on traditional PCs, its mobile app requires a subscription for unrestricted, on-demand listening. Of its 40 million active listeners, 10 million pay for the service -- most of which likely do so for the added mobile functionality.
This puts Spotify in an unfortunate position, similar to the one Pandora has faced in recent months: Going forward, Spotify will have to compete with larger, deeper-pocketed rivals that happen to own the very platforms it depends upon for its customers.
Spotify isn't a publicly traded company, but it's widely expected to IPO at some point in the near future. Given Apple's recent moves, investors eyeing a stake should be cautious: Though it's the on-demand, streaming music leader for the time being, maintaining that position could be remarkably difficult as more intense competition from Apple seems imminent.
Sam Mattera 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.