Late last week the news broke that Apple is buying Beats Audio for $3.2 billion. As most observers have noted, this is an unusually large acquisition for Apple, which tends not to buy companies that already have such prominent brands, for so much money.
With the Beats acquisition Apple gets a successful audio company selling trendy and profitable headphones and bluetooth speakers, along with a very young streaming music service in Beats Audio. Apple’s own iTunes Radio hasn’t exactly been a blockbuster, in part because it’s a pretty lackluster service to begin with. While Apple could build its own subscription service, it’s probably more efficient to simply buy an existing one, especially when it’s bundled with a profitable electronics brand.
However, if Apple wants Beats Music to compete head-to-head with the likes of Spotify or Pandora, the company will have to embrace one key aspect of their business models. Apple must create a free, ad supported version of the service. Right now, Beats has no ads, and is subscription only, with only a free trial to whet customers’ appetites.
I argue that Spotify’s fee ad-supported service is a critical component to its success in the US. The same is true of Pandora. Abstractly, it’s easy to grasp the value proposition of either service, but at the same time it can be difficult to justify shelling out another $5 – $12 a month for a music service when there’s already plenty of broadcast and internet radio out there for free.
But both Spotify and Pandora get more desirable the more you use them. With Spotify, in particular, you start mining obscure albums you want to sample, or get used to listening to much of the latest music, on-demand, without paying per-song. Once you’re accustomed to this convenience on your computer, it’s an easier sell to get you to pay a little bit to get the full experience ad-free, or on your mobile device.
Beats Music’s problem right now is that the free trial isn’t long enough to hook a lot of people. To really get the value of a music subscription service you have to live with it for a while, not just have a quick sample.
Now, Beats does offer a longer trial for AT&T users–up to 90 days. But the fact that not everyone can enjoy that length of trial works against it. One of Spotify’s and Pandora’s other strengths is social–you can share a song or playlist with any friend as long as she’s willing to sign up for a free account, no trial or credit card necessary. You simply can’t share that easily with Beats Music.
Understandably, not everyone is crazy about ads. Even though they’re much less frequent than those on broadcast radio, you still hear plenty of complaints about the ads on Spotify and Pandora. Of course, if you hate them that much both services offer a pretty simple way to turn them off, something you can’t have with terrestrial radio. Therefore, offering an ad-supported version of Beats Music is a small compromise that only enhances the apparent value of the ad-free paid service.
However, to really compete with Spotify, Apple has to do it one better and offer the full Beats experience on mobile with ads. Right now, Spotify doesn’t give free mobile users on-demand access, just shuffle play. That tactic is sensible, because it gives mobile users an incentive to go paid. But it also means that mobile users who don’t use Spotify on a computer aren’t getting to taste the full service; they don’t know entirely what they’re missing. Every day there are more folks whose principal internet device is a smartphone, and those are the customers Apple needs to win over to Beats.
To make this even clearer, let’s look at the numbers. Spotify racked up its first million paid subscribers within about a year of being available in the US. Beats would need to quadruple its subscriptions in about twice the amount of time it took to rack up the first 200k. That’s not an improbable feat, though I wouldn’t bet money on it.
For comparison, let’s look at another subscription music service that’s more like Beats, in that it doesn’t offer a free ad-supported version: Rhapsody. It’s actually been around for more than a dozen years, and it took about a decade to reach 1 million paid subscribers.
Though Spotify has not released subscriber numbers recently, analysts estimate it has about 2.5 million paid subscribers now. If true, that indicates it’s keeping up its rate of subscriber acquisition.
It shouldn’t be difficult for Apple to bring ad support to Beats Music. The company has already rolled out an ad sales force for iTunes Radio, a move that has caused many in the broadcast industry to look nervously over their shoulders. It’s my guess that Apple isn’t planning on losing with ads, it just needs a better service to wrap around them. Beats Music is that service.
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