Apple’s $3 Billion Bet on Reinventing the Music Industry

Apple’s $3 billion Beats acquisition was puzzling to many tech industry observers, not because Beats sold expensive headphones, but due to the music business having largely been ignored for the past few years. Why did Apple invest $3 billion in music when it seemed like not much else could be added to the equation to change the inevitable shift to music streaming? Surely, Tim Cook had lost his mind. Six months later, Apple’s vision for Beats is becoming clearer and Apple is aiming quite high. Apple wants to reinvent the music industry (again) and place it on a more sustainable track.

Today's Music Landscape

The music industry is far from perfect.

  • iTunes music sales are down 10-15% in 2014. 
  • YouTube is seeing, in each month, 1 billion unique users and 6 billion hours of video watched. 
  • Paid streaming remains niche (Spotify has 50 million active users with 12.5 million paid users).
  • Ad-supported and paid radio remains niche (Pandora has 76.5 million active listeners).
  • Music discovery and curation is difficult.
  • Artists lack vital information on their fans. 
  • Monetization beyond concerts and endorsements is difficult.
  • Buying concert ticket sales is difficult.
  • New talent faces difficulties when trying to “make it” without proper backing and support from established circuits.

For the past 4-5 years, I’ve turned to YouTube for all of my music despite having a paid song collection numbering in the thousands. Since the songs are in iTunes, I often find it easier to pull up YouTube in my web browser or on my iPhone rather than scroll through my music list on my phone or open up iTunes on my Mac.  Others get their music from streaming services such as Spotify or Internet radio like Pandora and iTunes Radio. While a lot can be written about the business economics of companies like Spotify and music streaming in general, I thought Spotify CEO Daniel Ek's blog post this morning, especially the last paragraph, summed it up pretty well. 

'We’re getting fans to pay for music again. We’re connecting artists to fans they would never have otherwise found, and we’re paying them for every single listen. We’re not just streaming, we’re mainstreaming now, and that’s good for music makers and music lovers around the world."

Last week Taylor Swift bolted from Spotify and within a few hours of the announcement, disclosed record album sales. Coincidence? It doesn’t take an expert to run the math: ad-supported streaming (in its current form) isn’t going to put the same kind of money in musicians' pockets as paid downloads. With Spotify, the money is an after-thought as musicians use Spotify to improve their visibility and then focus on making money in the future through concerts or branding/sponsorships.  While YouTube has made it easier to get discovered, there are still plenty of roadblocks that prevent them from making it to the next level and actually distribute music, schedule a PR campaign, and book a tour.  Add in Facebook, Twitter, and Instagram, and musicians are spending a lot of time (and money) simply managing their fan interaction.

How could Apple solve some of these problems? Eliminate or reduce points of pain or friction, including monetization, discovery, and interaction.

Acquiring Beats

My gut reaction to Apple buying Beats was one of branding and mindshare. Apple’s iTunes was losing relevance in pop culture, and paid download sales were beginning to decline. Meanwhile, Beats’ headphones were everywhere in advertising and social media. Apple’s white EarPods were losing their “cool” factor in the music scene. Jimmy Iovine wasn’t on my initial list as to why Apple bought Beats, but now it’s pretty evident that Iovine’s contribution should not be underestimated as demonstrated by his captivating speech at Revolt.

The Music Industry needs their “App Store” moment.

A good analogy for today’s music industry is how the software industry looked prior to Apple’s App Store. Before mobile app stores, a developer needed significant resources to distribute and then maintain software, leading to difficult entry barriers for new participants. Piracy was rampant. After the App Store was introduced, it was much easier (and cheaper) to work on software and then distribute product to millions of customers across the world. Similarly, for music, a platform built on software and features can make it much easier for new artists to reach fans while helping to monetize product by building brand equity.  While I wouldn’t go so far as to think of a music artist as an “app”, mainly because I think the analogy stops way before that point, it is more appropriate to look at the music industry as needing a revolutionary update, its own “app store” moment, to set it on the right path.  The music industry is still going off fumes from decisions made in the early 2000s following the Napster debacle and many are afraid the current indecision may handicap the industry’s next big decision.

Tomorrow's Music Landscape

Michael Vakelenko wrote an interesting post titled "To Understand Beats you Need to Understand Lady Gaga"  back when Apple bought Beats. I highly recommend reading it. Vakelenko argues that the music industry needs an "Uber" - an entity that will "aggregate demand", simplifying the artist/fan relationship.  Eliminating many of the music industry's friction points (monetization, discovery, interaction), results in a scenario where:

  • Music is free, but delivered via a platform where artists rely on software to monetize the brand (image and personality) through merchandising, advertisements, sponsorships.
  • Artists have access to information on their fans. 
  • Artists can set up their own tours including ticket sales, booking venues, and even PR circuits through third-party apps.
  • New talent can transition from discovery to monetization quickly without many barriers.
  • The definition of “music artist” becomes boarder to emphasize a wider range of content creators.

Musicians will be CEOs of their brand. The digital product known as music can be thought of as marketing where artists rely on the platform to monetize their brand to loyal fans. Musicians can easily integrate existing social media services (Twitter, Facebook) into this platform, although there could be built-in mechanisms to connect with paid, loyal supporters. There will be plenty of opportunities for musicians to make money from advertisements where appropriate. Maybe a new kind of streaming service can now enter the picture. Additional possibilities can go further into merchandising, concert tickets, branding.  As Iovine put it so well, it will be the "business of music" and no longer the "music business."

Beats Wants to be that Unique Music Platform

I suspect Iovine, and quite a powerful supporting cast, are working on making Beats that unique music platform. With iTunes, Apple is no stranger to the music industry and continues to hold much sway (800 million credit cards), but with Beats, Apple is now positioned even stronger with many friendly (and better-aligned) relationships to music artists, and I would even argue industry insiders.  While Apple makes a significant share of its profits from hardware sales (supported by software), a revamped Beats music platform would represent another service for Apple, similar to Apple Pay, which can represent a diversification item, but more importantly, the ability to eventually transcend hardware.

  1. Beats could set up a revenue sharing arrangement with music artists going as far as to include concert sales and merchandising.
  2. The Beats platform would be both “open” (available on competing mobile platforms), and yet “closed” (built-in curation and approval process).
  3. Beats could position music as a competitive advantage for Apple, guaranteeing that iOS users will never fall victim to competitors purposely limiting functions or usability like Google’s behavior with maps. 
  4. Apple would use this as a learning opportunity for how to handle apps and video.

Bono and Trent Reznor have both made comments about working on a new digital music delivery product with the focus being on building fan excitement. While I wouldn't read too much into anything being said in interviews, the point is Apple is tugging at the strings behind the scenes. 


The obvious competitors to a new Beats music platform would be companies with current connections to entertainment, a diverse base of talented human capital, immense reach and distribution (YouTube, Facebook, and Twitter come to mind). Of course, each one of these companies is positioned differently to the music industry and have their unique set of strengths and weaknesses.  Twitter is more likely preoccupied with its primary goal of how to get more subscribers to use the service than dedicating extensive resources on music. Facebook may suffer from brand fatigue, while YouTube may not mesh well with the music industry’s demands concerning product and monetization.  Of the three, YouTube would appear to be most promising. One variable in this dynamic may be if artists and labels are interested in supporting only one platform versus spreading resources thin across platforms. Beats’ connections to the music industry could obviously be a strong obstacle for competing companies. 

Making the Transition

This transition will not be easy and there are plenty of people and companies in the music industry with a vested interest to make sure this transition doesn’t occur smoothly, but as with many things in this digital era, ultimately all roadblocks are broken and it is better to embrace change rather than bet against it. 

Receive my exclusive analysis and perspective about Apple in a daily email containing 2-3 stories (10-12 stories a week). For more information and to sign up, visit the membership page