Apple (NASDAQ:AAPL) is expected to debut its new music streaming service next month, and now there's a bit more evidence now that the company is doing it at just the right time.
This week, Warner Music Group said in the past quarter for the first time, its music streaming revenue surpassed sales of the company's music downloads, and that revenue from streaming was up 33% year over year.
On the earnings call, Warner Music CEO Stephen Cooper said, "The rate of this growth has made it abundantly clear that in years to come, streaming will be the way that most people enjoy music."
While Warner Music might be ahead of others in streaming revenue versus download revenue, the entire music industry is moving in this direction. A Nielsen SoundScan released in January showed that on-demand music streaming was up 54% for all of 2014, while sales of digital albums and tracks declined.
In prepared comments on the report, the senior vice president of industry insights at Nielsen Music stated that, "Music fans continue to consume music through on-demand streaming services at record levels, helping to offset some of the weakness that we see in sales."
This is where Apple comes in. The company knows just as well as the rest of the music industry that consumers are moving away from digital downloads. In 2014, Apple's digital music sales fell 14% worldwide, year over year.
The combination of falling iTunes music sales and the industry's rising music streaming revenue means Apple could launch its new service at just the right time -- if it can convince music labels that its new service will make them more money than they earn from Spotify, Pandora, and others.
How Apple could gain the upper hand
One way Apple aims to do this, as first reported by The Verge, is by persuading music labels not to renew their free streaming licenses with Spotify and others, and instead get behind a new iTunes streaming service paywall.
Apple's rumored subscription-based music streaming service is expected to be a completely revamped version of iTunes (built out of its acquisition of Beats Music), complete with exclusive content, for a cheaper price than its competitors.
Apple's service won't include a free ad-based option, which almost all music streaming services offer and the industry doesn't like. Even given Warner Music Group's recent experience with streaming, much of the music industry still makes less from so-called "freemium" offerings than it would from receiving a cut of paid streaming subscriptions.
Speaking to The Wall Street Journal in November, Universal Music Group Chairman Lucian Grainge said that while ad-supported music services have attracted users to streaming, "ad-funded is not a sustainable business model."
Apple doesn't think so, either, and its new service should shift users away from that old model, much like the original iTunes helped move users away from pirating.
According to research from P. Schoenfeld Asset Management, by 2020, 250 million worldwide music streaming subscribers will be generating over $16 billion in streaming revenue. The industry looks at numbers like these and realizes that it will receive a much smaller percentage of that revenue if it is only being paid from free, ad-based services.
Apple appears to agree, and when the company's new service debuts next month it will tap into that sentiment at a time when the industry is ripe for a music streaming revamp.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple 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.