This weekend, the world's biggest independent musician went toe-to-toe with the world's largest company in a David vs. Goliath matchup. And apparently Tumblr is the modern day slingshot, because the "little guy" won with Apple (NASDAQ:AAPL) reversing course on its controversial streaming policy.
In an open letter titled "To Apple, Love Taylor" and released on the artist's Tumblr page this weekend, Swift discusses the reasons for holding back her new album from the service. Specifically, the issue centered on the introductory three-month membership period that Apple was initially offering for no charge. Although Apple has negotiated a larger payout than the industry standard, at a 71.5% payout with music owners (labels, songwriters, performers, and so on), Apple negotiated no royalty payout during the aforementioned first three months, as it will take in no revenue.
And while Apple was able to secure most labels, a few artists and independent labels wary of the streaming format spoke up about the arrangement. And, apparently, Swift agreed. As she wrote in the letter: "I find it to be shocking, disappointing, and completely unlike this historically progressive and generous company."
Monday, Apple returned the communication with Ms. Swift as its SVP Eddy Cue tweeted Apple's about face. Apple will pay artists for streams during the introductory period. Everybody should be happy about this change, except for the rather broad category of Apple shareholders...which includes many individuals with 401ks and mutual-fund investments.
Apple paid for this three-month period
While it's true Apple can pay artists for their work during this period, let's remember that three months is a rather short timeframe, and this period was designed to grow its music-subscriber base. That's important, because Spotify offers a free-to-consumer ad-supported option and Apple's late to the party. Since it's hard to compete on price against a free service, Apple needs to differentiate on quality and experience. The only way to confer a quality experience is to provide it.
However, there were two ways Apple planned to make up for this initial loss of revenue. The aforementioned larger payout should eventually pay off for artists, as their percentage of Apple's total take will be larger than through other payouts. For example, Spotify prides itself on "nearly 70%" payouts. And while 1.5%-2% doesn't seem like a great deal, over time those differences add up and can make quite a difference.
The end result for Apple shareholders, however, seems to be the worst of both worlds. It appears Apple is continuing the 71.5% payout it negotiated to compensate artists for the three-month introductory period while paying revenue throughout that period as well. And while I'm sure a few rappers can buy fancy new bling with those introductory checks, Apple shareholders are stuck paying a larger payout for content for the forseeable future. Normally Apple's known to drive a hard bargain -- ask bankrupt supplier GT Advanced Technologies, maybe GT should get Taylor Swift to negotiate its deals going forward.
Subscription versus ad-supported is a big deal, too
I feel another odd argument being bandied about is Apple should pay artists during the introductory period as to not anger the music community. And that's because Apple is attempting to change the streaming industry from an ad-supported model to a subscription-based model. The biggest winner from a change to a subscription-based model would be artists. For example, last year, publicly traded streaming-music company Pandora reported that a paying customer provided nearly $77 of revenue per 1,000 listener hours, versus only $42 for ad-based users. A larger pot of revenue plus a larger portion of said revenue is a win-win for artists.
To be fair, Spotify has a premium option as well, but it just hasn't converted ad-based users to subscribers as quickly as the music industry would like. In March, major label Universal was reported to play hardball with Spotify during content negotiations to force the company to try to convert users into more lucrative subscribers more quickly. Apple is well known for monetizing most things it touches and will probably do a better job of promoting the subscription-based streaming model than Spotify has. And let's face it, right now the music industry needs Apple more than Apple needs the music industry.
Can we address the "Apple can afford it" argument?
Interestingly enough, the debate oddly centered on the fact that--with nearly $200 billion in the bank--Apple could afford to pay the artists. And while that is technically true, that's not the point. Using Swift as an example, although she's a multi-millionaire many times over, that hasn't stopped Ms. Swift from issuing cease-and-desist letters to independent small business owners on Etsy that use her name and trademarks without permission as they compete with the $50 shirts on her website. And while Swift can probably afford to live with a small dent in her merchandise sales, that doesn't mean she should. She shrewdly took steps that will make her the most money. Apple investors should expect no less.
For the other (and more accepted) side of this debate, please read my colleague Dan Kline's rebuttal, "Why Taylor Swift Was Right to Take On Apple Music."
Jamal Carnette owns shares of Apple and gets Taylor Swift songs stuck in his head occasionally, but hasn't bought a T. Swift T-shirt...yet. 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.