By now, you may have heard about Apple's (NASDAQ:AAPL) new Apple Music service. Whether you were introduced to the relaunched platform by Apple CEO Tim Cook himself during the company's Worldwide Developers Conference keynote, or heard about it more recently due to criticism from pop icon Taylor Swift, the service has been oft-discussed in the media.
This week, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) announced that its competing streaming-music service, Google Play Music, would add a free, ad-supported option to its $10 per month Google Play Music All Access option. While the announcement sounds innocent, it only confirms the music industry needs Apple more than Apple needs the music industry.
Apple's trying to change the business model
While the nuances, features, and differences between streaming-music services can be overwhelming, the monetization model is quite simple. There are two distinct ways to make money in the industry: subscription-based revenue or ad-based revenue. The greater music industry (artists, labels, and songwriters) strongly prefers the subscription-based revenue model to ad-based revenue.
Music labels typically negotiate a percentage of revenue (also called royalties) that is split with streaming-music providers. In the case of Spotify, the percentage paid to rights holders is reported as "near 70%"; for Apple, the figure is 71.5%. As subscription-based revenue tends to be higher than ad-based models, those content rights holders would be entitled to larger payouts from subscription-based users. The problem for artists and labels is that the industry is rather dependent on the monetization model and skill of the streaming-music provider.
As a corollary, major record label Universal was reported earlier this year to be seeking to use content negotiations to make market leader Spotify become more serious about converting ad-based users into subscription-based listeners.
One moves toward subscriptions as the other moves away
In that vein, it's interesting to juxtapose Google's moves against Apple's in the streaming space. Apple appears to be marketing its service's subscription side while Google is moving decidedly in the other direction. And while Google correctly noted that its ad-supported version will "give artists another way to earn revenue," the company runs the risk of Google Play Music subscribers trading down for the free service if the premium differentiators of ad-free listening and on-demand song access aren't important.
To be fair, Apple has an ad-supported streaming option in iTunes Radio and will keep this option after the June 30 rebrand. But the new changes point to a push for subscription-based users rather than the ad-based format that encompasses the vast majority of Spotify users and the one Google Play Music is now offering.
So while Apple Music has had a somewhat inauspicious beginning (actually pre-beginning), artists should root for what appears to be the only company that can legitimize the migration of streaming music from an ad-based model to a subscription-based service. Will the service be a smashing success? Who knows. But if Apple can't pull it off I strongly doubt any other tech company can.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.