Apple (NASDAQ:AAPL) thinks spending $10 per month on a premium music subscription is too much for the average listener. The average music consumer spends only around $60 per year on CDs, vinyl, downloads, and streaming services. What's more, that's been true for the last 15 years when we've seen a huge transformation in the music industry. That's why Apple is talking with record labels to revamp its Beats Music service with a lower price.
When Apple approached record labels at the turn of the century to unbundle the album and sell individual song downloads through the iTunes Store, the labels were quite hesitant. Even with their industry spiraling downward, Apple had to work hard to convince them that digital downloads would ultimately benefit them.
Now, in the age of music streaming, Apple is trying again to convince record labels that they're forcing too high of a price for streaming services like Beats Music, Spotify, and Google Play Music All Access. Even Pandora (NYSE:P) is forced to charge $5 per month for its Internet radio service in order to make a profit. Can Apple convince them that lowering the price is what's best?
Who sets these prices anyway?
If Apple thinks $10 a month is too much, why doesn't it just go ahead and lower the price? The company can certainly afford to operate Beats Music near break even or take a loss if it helps promote its other products -- like those that end in "phone."
Actually, Apple doesn't set the price. Neither do Spotify or Google or anyone other streaming service. The record labels actually set the minimum price these services are able to charge through their licensing agreements. This makes it practically impossible for a company like Apple to explore the price elasticity of digital music. According to the record labels, there is none -- people either like a song and will pay any price for it, or they don't and they won't.
That's a ridiculous notion, though. Look at music piracy -- the very thing the music industry says is a huge problem for them. When music is free, people will grab it even if they have no desire to listen to it. This is what makes quantifying the impact of music piracy so difficult. One album download does not equal one lost album purchase.
Is it too big of a risk?
Back when Apple was talking with the record labels about the iTunes Store, digital downloads were a minuscule portion of the music industry's revenue. In fact, companies like Nielsen didn't even start tracking digital downloads until a couple months after Apple unveiled iTunes.
Today, streaming represents a large chunk of total music listening. Nielsen's mid-year music report showed that over 20% of U.S. album listens (1,500 streams to one album) are from on-demand music streams. Pandora accounts for 8.9% of U.S. radio listening. And IFPI reported that 28 million people around the world paid for music subscriptions as of the end of 2013. Overall, music streaming is a $1.6 billion industry.
What's more, those subscription rates continue to climb. In 2011, only 8 million people paid for a music subscription. So, the labels face the risk of missing out on revenue and the chance to determine the absolute size of the market at $10 a month should they concede to Apple. It will be very difficult for the labels to maintain their terms with other streaming services if they give special treatment to Apple.
Finding a middle ground
There may be room to compromise. Earlier this year, Amazon.com (NASDAQ:AMZN) bundled a music streaming service into Amazon Prime. The service features a select catalog of music that's at least six months old. It's also notably missing Universal's catalog, the largest of the big three labels. It's a very limited catalog, but that also means Amazon is able to bundle it with Prime for no additional cost to subscribers. Still, Amazon's limited catalog and subpar user interface seem to have limited its adoption.
Apple may be able to work out deals with labels to offer a less expensive on-demand service that features a catalog of older songs. And it could certainly improve upon Amazon's user experience. It could bundle this service with iTunes Radio and iTunes Store to round out its catalog with newer songs that aren't yet available on-demand via such a new service. It could also lead to more easily upselling users from the cheaper service to the full-featured Beats Music for $10 a month -- which is what the labels really want anyway.
Apple, with its insider knowledge of digital music consumers, seems to know that charging half the price of current subscription rates will ultimately benefit both the labels and the service providers. It's a tough sell for Apple to make though, considering the risks involved for the labels.
Adam Levy owns shares of Amazon.com and Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Amazon.com, 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.