Apple (NASDAQ:AAPL) has a blank space baby and it plans to write Big Machine Records' name.
The tech giant is reportedly close to acquiring the label, home to Taylor Swift, for $250 million according to music industry publication Hits Daily Double. The label, which has a distribution deal with Vivendi's (OTC:VIVHY) Universal Music Group, which is about to expire, has Swift under contract for one more album.
The deal, which would be the first of its kind for Apple, makes sense when you consider the company's various streaming music options as well as the changing landscape for the "record" business in general.
An extra mouth to feed
The music industry is at a crossroads where fewer people are buying albums both physically and digitally, but more people are streaming music. As you can see on the chart below, streaming revenues jumped by 28% in the first half of 2014, according to the Recording Industry Association of America, while downloads dropped by 13%, and CD sales fell by 19%.
The problem is that none of the major streaming companies -- including Pandora (NYSE:P) and Spotify -- make money. Both pay a large percentage of revenue for music rights (around 70% for Pandora, according to CNBC), but there has been widespread discord with those payment from artists. Swift herself even pulled her music from free streaming services around the release of her most recent album 1989 because of the rates paid.
The problem -- and it's one Apple assuming the role of record label can correct -- is that there are too many mouths to feed. Pandora, Spotify, and the other streaming services can't pay more, and artists in many cases make much less money than they did when album sales were king. The industry can no longer afford a middleman taking a big piece of the pie, and changing technology has actually made that middleman less necessary.
Labels are a relic
While the clout of a label can help an emerging artist, it's no longer a requirement of success in the music industry. There are plenty of acts that make a living in the industry without a label, and an act of Swift's stature certainly has little use for one.
Traditional record labels sign artists to deals where the company fronts the money for recording, distributing, and promoting an album. In exchange, the artist gets a royalty on each copy sold after the company has recouped its money. The label takes most of the risk, but it also gets most of the upside.
These services, however, are less necessary than they ever have been. Technology has lowered the cost of recording albums (many bands record in home studios now). Distribution is also much less of a challenge since any artist can sell through iTunes, Amazon (NASDAQ:AMZN), or countless other digital channels.
Promotion may still be valuable, but in many cases, it's not worth giving a label a huge cut just because it has good relationships with radio stations, talk shows, and the music media.
Apple is the new label
If Apple buys Big Machine, it can provide promotion, distribution, and of course, recording budgets if needed. Because the company owns iTunes (as well as the rumored-to-be-relaunching Beats streaming service) and has access to tens of millions of customers using its iPhones, iPads, and Macs, the costs associated with selling and promoting a record are much lower than they would be for traditional labels.
Apple can help Swift -- or other Big Machine artists including Florida Georgia Line, Rascal Flatts, and Tim McGraw -- release music efficiently. The tech leader can also make more money for itself while paying musicians higher royalty and streaming rates because it owns its own distribution and promotion vehicles.
Even in the case of Apple artists streaming on Pandora, Spotify, or other services, Apple would be able to take a smaller cut of the pie because it has so many ways to monetize music. An artist making a deal with Apple wouldn't be entirely cutting out the middleman, but he or she would be replacing a label with a partner that would not need to be quite so greedy.
What does Apple get?
In addition to the public relations boost of having its brand associated with Swift, the biggest-selling recording artist of the modern music business, the company would also get exclusive access to content.
Imagine the lure an exclusive window on a new Swift album would be to paid Beats subscription service? Or picture the benefit to iTunes of being able to sell new music in advance of it being offered by other digital download services.
Buying Big Machine gives Apple not only access to Swift, but a team of well-regarded music executives. Take that team and strip it of some of the expense of running a label/promoting artists, and pair it with Apple's infrastructure, and you have a company that could offer major artists very attractive deals.
Apple gets more sales; artists get more money. It's hard to see how that's not a win for all involved.