Why the Music Industry is Rooting for Apple

The music industry needs Apple more than it cares to admit.

Jamal Carnette, CFA
Jamal Carnette, CFA
Oct 29, 2014 at 8:03AM
Technology and Telecom

There are a few truisms when it comes to music: Your parents will hate your musical choices as you will hate your kid's choices, and all songs could use more cowbell. However, when it comes to the business of music, there's been no worse time for the industry ever. Even the payola scandals of the 1950s cannot compare to the problems facing the music industry today: Nobody wants to pay for its product.

The music industry has always been one of disruption in both content and delivery. Right now, music delivery is facing an epic battle. On one side is the digital download market dominated by Apple (NASDAQ:AAPL), and on the other is the streaming market led by Pandora (NYSE:P), along with a host of other providers. The music industry -- and artists -- desperately need Apple to win. In short, Apple has the future of music in its hands.

Right now, Apple isn't winning
A shocking report from The Wall Street Journal gives insight into the digital download industry. According to insiders familiar with the matter, digital music sales at Apple's iTunes store has fallen 13%-14% worldwide during 2014. When compared to last year's global download revenue drop of 2.1%, it signifies that, not only is the dive continuing, it's accelerating.

It isn't as if humans have stopped listening to music. Rather, they have found a new way to consume music – streaming-based music has disrupted the download/ownership model.

The industry and artists are paid better from the download model. A recent Time article indicated that independent acts can make around $0.005 from music streamer Spotify as opposed to $0.07-$0.10 per download on iTunes -- around 14-20 times more. Physical CD sales pay more, but have been falling for a decade.

One reason for the low payments is the company's business model. Although Pandora has a premium subscription-based service, the vast majority of its users opt for the free version. The company monetizes those listeners by ad-based revenue, and has to balance this against its costs (read: artist payments). And with those costs pushing $300 million a year, the company is reticent to raise payments to artists.

Enter Apple... a dual-format threat
In addition to stepping up its marketing for its iTunes music download store --something bold, think free U2 record -- Apple has the ability to pay artists more per streaming song. And it does.

When iTunes initially launched, it paid labels $0.01 more than Pandora paid. In addition, Apple agreed to pay labels 15% of net advertising revenue. And while iTunes Radio hasn't been the type of success that Apple fans are accustomed to, you can bet the music industry wants it to succeed.

Apple also purchased a streaming-music service, Beats Music, with its purchase of Beats Audio. Apple is looking to integrate this subscription-only service into its iTunes Radio in some respect going forward.

Industry executives fear digital downloads are declining due to a streaming model that is currently mostly ad-revenue based. One way to offset this decline is for streaming users to pay subscription fees that are ultimately more lucrative for labels and artists than ad-based streaming customers.

Although Apple currently has an ad-free model for iTunes Radio, it really isn't a subscription model as far as the music industry is concerned. If Apple puts its weight behind the subscription-based model that Beats espouses, it may reinvigorate subscription-based music, which would benefit the music industry.

The music industry is struggling, and it really needs the biggest seller of music in the world to execute. Tim Cook once said that, "[m]usic's always been at the heart of Apple." The music industry hopes Apple remembers that and returns the favor. One thing's for sure: The music industry is in desperate need of a positive disruption.