The annual Billboard Music Awards on Sunday were, as expected, a Taylor Swift coronation ceremony with the country/pop/rock(?) star taking eight wins out of 14 nominations. But when it comes to music, the biggest story (outside of Taylor Swift) isn't the introduction of a new genre, group, or video, but rather a rapid change of the delivery model.
For music, this has happened before: Records were replaced by 8-tracks, which were replaced by tapes, then CDs, then digital downloads. The latter switch gave Apple (NASDAQ:AAPL) significant market power as its iTunes content library acquired strong market share as a gatekeeper of content. Even now, iTunes is the top digital download site, with a recent study pegging its paid digital download market share at over 60% as of fourth-quarter 2012.
For Apple, however, the news isn't all good when it comes to its digital download business. Last October, The Wall Street Journal reported that Apple's digital download revenue had dropped 13%-14% since the start of the year. The Recording Industry Association of America reported an 8.5% drop in digital downloads in 2014. The reason given: streaming delivery. Now, Spotify is working with Starbucks (NASDAQ:SBUX) to expand its streaming user base while competing against Apple's digital downloads and streaming services.
Both companies get something from the deal, which Starbucks announced on May 18. Starbucks employees receive access to Spotify Premium, and its loyalty program members will receive access to Starbucks music on Spotify via the coffee slinger's mobile app and the ability to influence in-store playlists -- both of which serve to deepen the relationship and value for loyalty members. The deal seems even better for Spotify since its premium services will be promoted in Starbucks stores and because the music streamer will have instant access to 10 million Starbucks Rewards loyalty members as part of the agreement.
Unlike a large percentage of Spotify's 60 million global users, Starbucks already has its rewards members' credit cards on file, paving a way for Spotify to convert potential users into more-lucrative Spotify Premium subscribers. The nexus of this partnership is the "Stars as Currency" promotion in which Spotify users can access and earn Starbucks loyalty rewards points.
While the companies did not disclose specifics of the "Stars as Currency" promotion, Spotify becoming the first third-party partner with Starbucks is a huge opportunity for the company to bolster its user base for the ad-free, paid Spotify Premium service. The company has come under fire by record labels and artists for not doing more to monetize its user base, with Swift even pulling her catalog off of the service.
A pre-emptive strike?
This is a way for Spotify to differentiate its service and introduce its product to a new clientele. That's important in an increasingly crowded market. Outside of streaming-only services competitors such as Rdio, Pandora, and Jay-Z's new Tidal service, tech giants Google, Apple, and Amazon.com are expanding into streaming delivery. Considering the delivered product, music, is essentially the same among these services, the rush to be the first to consumer and establish familiarity is high.
Apple's has a free, ad-supported streaming service in iTunes Radio (ad free with a $24.99/year iTunes Match subscription), but appears to be rolling out its Beats Audio streaming service as well. The new service seems to have no free version and is rumored to cost $9.99 monthly. While Spotify gained expanded access to 10 million people and promotion agreements from its new Starbucks partnership, Apple still commands a huge built-in potential market with its massive U.S. iPhone installed base of 94 million users. Spotify's move should be commended, but for Apple investors this isn't a large story.