Executive Turntable: Can Classic Label Talent Transition to Digital Formats?

Warner Music Group Grammy Celebration Hosted By InStyle
Lyor Cohen knows all about how to rub elbows with artists like Elvis Costello and Diana Krall, but how will that rub off on YouTube?

Old-school record executives seem to be joining new-school digital music companies in increased intensity.  In the past few years WMG’s Stephen Bryan (Soundcloud), Interscope’s Jimmy Iovine (Apple), UMG’s Amanda Marks (Apple), super-manager Troy Carter (Spotify) have all been wooed to some of the most prestigious companies.  Last week, the big kahuna Lyor Cohen, former CEO of WMG and founder of Def Jam, joined YouTube as head of music for the company. And  it isn’t some honorary title, where he deals with artist and industry relations. He’s running the whole thing!

What’s going on here? Obviously these companies all know they need to beef up their ranks with people who know the ins and outs of the music business. After all, a good relationship with your content supplier is extremely important. But it’s only one factor in building a successful music company. There are other essential skills that being a good label executive doesn’t necessarily provide the appropriate experience.

First let’s get something straight. All these label execs are eminently talented. You don’t get to the top of  label orgs without a herculean work ethic, serious business chops, and massive brain power. But getting to that level doesn’t  necessarily mean you can run other complex companies. After all, CBS Records’ Svengali Walter Yetnikoff might have built the company into a powerhouse, but it doesn’t mean he was qualified to do Russ Solomon’s job at Tower Records.

Record companies do many things; but at its core is scouting, locating, and developing talented artists. It’s a tough job we discount too often. You have to have a great understanding of art and a finely tuned ear to what people will respond to. But digital music companies have different needs: product development, technical acumen, and a keen understanding of what users will find compelling enough to open their pocketbooks. You also must know how to lead tech teams and understand how people use and adopt new products.

While there obviously is some overlap between these two diverse core skills, there’s a lot that doesn’t fit. We’ve seen this manifest when companies try to move into the other’s turf. Labels time and time again have failed at direct to consumer offerings. The efforts have gotten considerably more ham fisted as technology has played a larger role in the  industry. From its inability to secure files on CD and all the way up to the ridiculous Now! subscription service that rolled out just last week, nearly every label’s tech initiative  or direct-to-consumer offering has underperformed or been an outright disaster (Pressplay, anyone?). Likewise, digital music services struggle with artist relations, leading  to wary feelings between artists and digital services, or straight-up hostility.

DNA Mismatch

Both labels and digital services struggle to meld because they’re so different. At their essence, labels are about artists. Everything is built around finding and developing great artists. Talent is also the core talent of most senior execs at labels. Sure, there are probably great dealmakers, technologists, and marketing whizzes working at UMG, but ultimately, it all serves the artist. Meanwhile the digital services are all about the customer. And yes, artists are vital for services, but if push comes to shove, product development, not artist development, wins.

So when labels end up going directly to consumers, they’re on unfamiliar turf. Likewise, when Tim Westergren says something that sounds awfully stilted to the artist community, it’s because he’s not capable of fully serving both sides. Ultimately, he must side with his listener. You can bring in label talent to the music services to help co-mingle the two sides. But it won’t change the DNA of the company.

Free Advice

Look, I’m not telling you that digital music services are the model of how to build the modern company. Spotify isn’t Jack Welch’s GE or even Reed Hastings elite-level Netflix.  There’s a tendency to rely too much on technical solutions and not enough focus on customer problems, which leads to a functional–but not a very warm–product.

So if I were to give advice to say, a new executive at, say, the world’s largest free music listening service, I’d suggest following a few axioms about how to build his or her new team.

  1. Empower Product Leaders
    Too often we end up hiring product development professionals but don’t empower them to make decisions. Product is the core of what these companies do and to fully take advantage of this, you need great product talent in leadership positions. When you don’t own the content, you have to win on product, full stop. And yeah, I’m a product guy, so I’m biased. But I’ve seen what happens when you don’t prioritize the right talent in the right roles, and it’s not pretty.
  2. Practice Design Thinking
    Although tech products are much better today than even five years ago, we have a long way to go in building out thoughtfully designed products. You can tell a massive difference in Spotify versus a company where design is front and center like Airbnb. If you start with design solutions, rather than technology ones, it will resonate a lot more with your users. Cool tech is just that. Cool. Solve problems first and foremost, my friends.
  3. Different Analytics For Different Goals
    Labels have invested in analytics teams in varying levels. Most of these  efforts– including UMG’s exceptional data analytics team and Lyor’s start-up The 300– used data to identify artists that will perform best, which is just an evolution of what labels always have done. Spotify and YouTube have both invested heavily in solutions to solve ‘what to play next.’ While YouTube’s recommendation products are good, they don’t have the sheen of Spotify’s Release Radar, Daily Mix, and Discover Weekly, perhaps the best of all the technology centric recommendations. The lesson here: using data science and machine learning to create superior user experiences is the foundation of any successful digital music product.
  4. Market Like A Retailer
    If there’s been one element missing from most services, it’s figuring out how to sell them to mass audiences. At its core, the pitch seems to be “Hey, you like music. Well we’ve got lots of music. Come get some!” Okay then! The services need to get better. While it’s clear that music services are different than retail, the attention to detail and stronger relevance to the customer’s life would help the services define a) what they are and b) who they are for. Without that kind of definition, mass consumers will continue to pass.

None of this stuff is surprising. Let’s just file it under ‘doing the basics really well.’ But the labels, and the people who built their careers with them, still seem like they are steeped in another era. Digital is different, and building an elite team that can navigate this competitive market requires a different skill set. A phenomenal product team is today’s A&R. Invest wisely.

Billboard: Lyor Cohen’s Move to YouTube: Good Or Bad For The Music Industry

Hypebot: Music Industry Uncharacteristically Silent about Lyor Cohen to YouTube

Bobby Owsinski: YouTube Misses The Point With Lyor Cohen Hire

Consumerless Recovery: Music Revenues Are Up But Is More Pain Coming?

News this week, for once, was positive for the music business. The RIAA released its report for the first half of this year and there was an eight percent growth in revenues over the same time 2015, thanks to subscription streaming. At long last, after years and years of losses, we’re finally on the other side of the decline and now we’re going to see a huge run up of revenues as the industry continues to grow like gangbusters. At least that’s what you’d think from the headlines. I agree: it’s a good result. But there are also troubling signs in the numbers.

screen-shot-2016-09-22-at-10-55-58-am
Source: Recording Industry Association of America

You see, while revenues are up, the number of people who buy music has steadily fallen for the past decade. According to MusicWatch, a music industry research firm, the number of people buying rebounded a bit in 2015 to 85 million, it’s still significantly down from the buying population 10 years previous.

Not all consumers are created equally. Over the years the average consumer spent around $50 a year on music. Sounds pretty good, right? Well, the average consumer only about about 1.5 CDs a year. So how is that possible. Well, there was small number of consumers who bought 10 or 20 times what most consumers did. I used to see this all the time in line at my local record store. I’d be wondering if I should be buying the 10 CDs in my hand on my meager first job salary (the answer was no). Meanwhile, the woman in front of me was buying the Debbie Gibson CD for her daughter. It most likely was the only CD she’d buy all year.

screen-shot-2016-09-22-at-12-01-28-pm
Sources: MusicWatch and U.S. Census Bureau                     Music Buyers in Millions

This has all changed in the subscription era.  We’ve flattened that curve between the casual buyer, who only bought Adele’s 25 last year, and that obsessive-compulsive music nut who happily subscribes to Spotify. Sure, the nut is still spending much more than casual fan. But at $10 a month, it’s capped at $120. And yes, the music nut might also purchase vinyl, buy up posters at Flatstock, and attend music festivals, but they don’t have to pay more for all that music. Many super fans I interviewed to while working at a streaming service thought they were getting away with something by only paying $10 a month.

The theory of the streaming era is that we’ll produce so many more subscribers, that we’ll make up the difference in revenue. But thinking that casual fan will pay twice as much as the average consumer spends is fairly flawed logic.

Especially when one considers how people are listening today.

 

Based on MusicWatch’s recent audiocensus report, more than 70% of all listening today is on services that are free, like Pandora, YouTube, Spotify’s free service and iHeartRadio. Because when faced with the choice of $10 a month for something they use rarely or free, casual fans choose free. Duh. Hence the massive decrease in the percentage of buyers.

Much like how the U.S. economy recovered in the years after the housing market collapse, but only with many fewer jobs, the music industry is recovering. But with many fewer customers. And the pain is just coming. Compact discs may only be a shadow of its former self, but there were still 38 million CDs shipped in the first half of this year. Question: when was the last year you bought a device that can even play a CD? While vinyl and even downloads have a purpose and will maintain some attractiveness, my contention is that CDs will go to zero. This, my friends, is a problem.

So what can be done?

Perhaps address the product itself. Streaming services main use case is access to all the music. While it’s great for the fan that knows what she or he wants to play, it causes more problem than it solves for the casual fan. After all, how many times do you sit at your computer and not know what to play next. Even with 30 million songs only a seconds from a search.

Considering after all these years peddling subscriptions to consumers, we now have a total of  18 million subscribers in the U.S., I’m sure it’s safe to say that the $10 all you can eat music subscription isn’t the product for anything but the super fan. Will there be more growth? Yeah, sure, no doubt. Can it grow to 50 million? Doubtful.

So what about lowering the price, which has been bandied about as a cure all? Beyond the fact that rights holders won’t budge on price, it probably is the wrong product for those who like to listen occasionally. “Casual fans have different needs than super fans and may be fine with a more basic experience,” Russ Crupnick, managing partner of MusicWatch, told me via email. “So converting them to paid requires a different set of strategies and tactics. Lowering price alone won’t automatically convert them into super fans.”

Last week Pandora announced improvements to its free service as well as Pandora Plus, a product that merges a few on demand features, like more skips and the ability to save tracks to the phone for offline use, to its core experience. Can the new product as well as Amazon’s planned subscription service, which apparently will share Pandora Plus’s $5 price, help? Perhaps.

But those are just two ideas. In the world of product development, it takes many attempts to find the perfect product market fit that people are willing to pay for. Licensing two and saying ‘okay, we’re done,’ is not going to cut it. It took 15 years, a handful of flopped companies and at least a couple hundred million in funding before AYCE streaming services finally produced a billion dollars in revenue. My guess is that it will take years to attract the casual fan. Fact is, we’re going to need wave after wave of ideas to grow customers again.

Variety: Music Streaming Wars: Consolidation Looms as Lower Prices Kick In

Music Industry Blog: Have Spotify and Apple Music Just Won The Streaming Wars?

 

 

Evolution Trumps Revolution: Why the Macbook Air Unveiling Is the Real Star for Apple

Forget the watch.

This week Apple announced the ship date and details around its first foray onto the wrist, the long-awaited Apple Watch. Of course the press fawned over the details and the design of the device, as the richest company in the world takes on luxury brands like Rolex.

But the watch wasn’t even the most important announcement today. Not when you take into consideration how Apple is approaching the diversity of screen sizes.

We might look back at the announcement of the 12-inch MacBook (note Apple is no longer using the Air name) as the beginning of the end of iPad Era for the company. Over the past few years, the iPad sales have slumped for a variety of reasons, mostly because the pincer maneuver of phones are getting bigger and more useful and computers getting lighter and more efficient with better screen resolutions. The need for a tablet has waned as each of these technology trends eroded the popularity of tablets.

The new Macbook combines a size of an iPad (though slightly larger) with the functionality that once was only available in the MacBook Air or Pro lines. With a Retina display, Apple hopes the 12-inch MacBook will lead lots of iPad consumers to consider it instead. Earlier this year, CEO Tim Cook stated he believes Macs are cannibalizing iPad sales.

Mac Daddy
Apple sold 5.5 million Macs in their record-breaking quarter that ended in December. Granted, that is a drop in the bucket compared to the company selling 74.4 million iPhones or even the 21 million iPads in the same period, but it still shows the strength Apple has in computers. Although Apple doesn’t break out specific sales per model, the company trumpeted the new iMac with a 5K Retina display as the main driver of the sales.

For several years now Apple has been busy slimming down the laptop by removing features that we thought consumers couldn’t live without. With each version, Apple continued to nip a drive here, tuck an under-utilized port there. The end result: a lightweight, killer machine with terrific battery life that leads the industry. The current MacBook Air 13-inch weighs less than three pounds and boasts a performance very close to the MacBook Pro version.

Simplest Mac Ever
For the new MacBook, Apple is even stripping away more, leaving only a headphone jack and one multi-functioning port. The machine takes advantage of the new Intel mobile device microchip, allowing for more battery life and lighter weight. The machine comes in at two pounds that can last all day.

What Apple kept, though, and even greatly improved, was the keyboard. Fact is that despite all the tablet hoopla, consumers like a keyboard. Even Microsoft understood this and added the colorful detachable keyboard to the Surface line.

Some have commented that the machine doesn’t really seem like a real computer. But what a real computer is has changed. Sure the new Macbook isn’t going to perform when crunching massive Excel files or editing video. And yeah, the company is selling a $79 dongle that many hardcore business users will need to project a presentation on a screen.

But devices have been trending toward wireless transmission for years now. I don’t suppose that we’re going back to a wired world anytime soon. The need for a bunch of ports is fading fast.

Apple has clearly seen the future of computing and is creating a device that will just go ahead and compete directly with iPad. It is something that other companies would avoid at all costs. But Apple has seen the writing on the wall and is adopting its strategy to take advantage of the trend.

The Watchman
Yes, the Apple Watch does suggest a shift for the company. It is reminiscent of its big audacious bets with the iPod and iPhone. By creating a huge market that didn’t exist previously, the company believes it can dominate like no other. The iPad was meant to be another example of making a market.

Only time will tell if Apple is able to make a mass market out of wearables. But by re-envisioning what computing looks like in the future and aggressively changing its product, it could be that the new MacBook ends up being the biggest winner from this week’s announcements.

Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

BillboardFight Between Apple and Spotify Could Change Digital Music

This is amazing! First, we hear there’s a lack of comfort with free music and how Spotify should have so many more than 15 million paid subscribers. Then Apple marches in, provides market research evidence to the labels how many more customers (and therefore, revenue) the industry could garner with a lower price point and labels say ‘no way.’

Why? Well, then labels would have to offer lower pricing to the entire industry so to not advantage Apple. Glen Peoples‘ source at the end of the piece is absolute right: labels are deathly afraid of Apple becoming the entire music industry. A strong Spotify is required to counter Apple. Freemium isn’t going anywhere, though a listening cap could come back for a brief time, as it did a couple years ago.

No matter what others in the media absurdly suggest, the reason Apple isn’t interested in freemium is because it doesn’t need it. The main goal of freemium is to attract listeners and then slowly convert them over time into a paid tier. Listeners won’t be a problem for Apple as the streaming app will be pre-loaded on every iOS device and most likely baked into iTunes.

Free Music Lives

Trust me, Apple will feature free music in the streaming product. But instead of paying for freemium, the company will offer labels promotional opportunities. Nobody can bundle the power of the iTunes store with free streaming for a week or month. That’s a killer combination for labels, even with paid downloads falling.

And converting those listeners into subscribers? Apple already has an enormous amount of valid credit cards, so it’s just a matter of signing in to subscribing. So why would Apple pay hundreds of millions of dollars to major labels for freemium when it already has distribution and payment covered?

Price Fixating

Eddy Cue, Jimmy Iovine and the Apple team have been harping on labels to consider lower the price of streaming. There’s been more and more data analysis showing a lower price of streaming will lead to many more customers signing up, more than making up for the loss of revenue. And I’m sure that Apple presented significant market research and bulletproof data that proved the point.

Despite overwhelming evidence, the labels stuck to their guns, and said if you want to charge less, you can pay for it. Meanwhile the largest streaming service in the world, YouTube, continues to give away free music at a scale the dwarfs Spotify and Pandora combined.

And you wonder why the music industry can’t grow. Not that we needed more evidence.

Sweet and Lowedown

Will Apple’s Tastemaker Test Win The Streaming Music Challenge?

Apple made big news last week by hiring one of the music’s best tastemakers, Zane Lowe, the preeminent DJ on BBC Radio 1 who has introduced the world to artists like Arctic Monkeys, Gnarls Barkley, Adele and Sam Smith.

With Zane’s hiring and the reported tapping of other music journalism talents, Apple is betting big on the ‘human curation’ chestnut that Jimmy Iovine used to sell the service to music fans, and more importantly, to Apple last spring.

Curation is believed to be a solution for streaming music’s problem of what to play next. All-you-can-eat music services like Spotify and Beats provide access to tens of millions of songs, but listeners consistently run into the issue of figuring out what they want to hear next. So by creating recommendations, radio stations and playlists that the music fan might like, curation helps alleviate the problem.

Except it isn’t that easy.

Why? First, is there’s a lot of music. Millions and millions of songs are available on these services and figuring out everything about the music is rather difficult. And then there’s the user expectation. A broadcast radio tastemaker like Zane is pretty adept at talking to a lot of people at once, but streaming the music customer expects—if not demands—a unique music experience based on their taste and listening habits.

The Beats Formula

Curation solutions have come in two flavors. Companies either use automated technology solutions, like Pandora’s ‘music genome’ and the Echo Nest’s taste profile. Or you hire a staff of music experts to pick music.

Beats’ Co-CEO Jimmy Iovine and Chief Creative Officer Trent Reznor rightfully pointed out that most services have the soul of a hard drive and that music fans craved more in a music experience.

Beats preferred playlists selected by humans, experts on music who understood what the listener needed music for, like cooking dinner, exercising or studying. The startup went on a spending spree, hiring a team of music programmers to build playlists and pick the perfect song. While others, like Rhapsody and Emusic, had staffs of curation experts long before Beats, Jimmy was the first to make human curation the main selling point.

When it launched, Beats had subscribers  select their favorite style of music. Afterwards, the service would feature playlists built by their staff of music experts who hailed from the radio industry and music blogs. Beats playlists were indeed compelling but the depth of the lists appeared to be light and the curation stale. After all, how many times can you listen to the same 15 tracks on the Indie Breakup or 2006 Hip Hop Gems playlist? Fact is hand curation requires a lot of hands to consistently churn out new lists, something the service didn’t quite get right.

Emotional Math

Beats management objected to algorithms that automatically choose the next song based on a set of rules. “The promise of algorithms that we’ve all bought into over the past few years, that you enter a band and you are going to hear a ton of music that’s all based on that seed,” Trent Reznor told USA Today last year. “I think we’ve all realized the reality of that is that it’s a shallow puddle, it immediately kind of sounds good and then you realize the limitations and you start to hear the machine in there.”

“(With an algorithm) you are using math to solve an emotional problem,” is the way Jimmy Iovine put it. He is partially correct. When the catalog is tens of millions of songs and you have millions of customers, picking what song comes next can only be tackled by math.

It’s impossible for a service to function without any algorithms. There’s just too much data and you need to rely on something with automated rules to do some of the heavy lifting. Even Beats, despite its marketing message of ‘the music service with music experts’ had several different algorithms that were used in the service or under development.

So marketing pitch or not, everyone (in one way or another) must use math to solve these problems. The success or failure of algorithms and curation depends on how companies employ the products and who’s in charge.

It’s far from me to tell Apple what to do, but hey, that’s never stopped me from dispensing advice of questionable value. Here are my guiding principles for building curation and algorithms in streaming services.

  1. The Right Tool for the Right Job

As much as I have a problem with Pandora and their marketing of the ‘music genome,’ the company sure went about solving the right problem with their algorithm. Simply put, Pandora is designed to serve up around 40 solid minutes of songs for the person who likes to listen to music. It doesn’t do more than that and that’s a good thing.

Technology products get unwieldy because they are designed like a Swiss Army Knife. My general rule is that technology solutions need to be designed to nail one solid use case at a time. Expansion beyond that gets to be tricky.

A good example: I recently spoke to David Porter, CEO of 8tracks, a radio service that features playlists curated primarily by the service’s pro DJ community. David mentioned that 8tracks had recently hired a data scientist to match his listeners to playlists that they might enjoy.

An algorithm must be very good to nail this use case, but it doesn’t rise to the level of a playlisting algorithm, where a user will think you don’t know music nor them if a Coldplay song ends up in a Jose Gonzalez playlist.

Defining what your algorithms are meant to do and sticking closely to those use cases is vital for success.

  1. Man Guides The Machine

An algorithm must be built as a tool for curators and not simply a technology product. Therefore it must be tunable and adaptable. There is no such thing as ‘code lock’ on an algorithm.

In my experience, this is not the way many algorithms have been built. Machine learning–the ability for algorithms to improve based on usage–is a big topic right now for many technology companies, but I have yet to see one example of a music algorithm that gets smarter with time. Ensuring curators have input and a modicum of control of algorithms is extremely important.

  1. Playing Your Position

What makes managing a music algorithm so absurdly challenging is that no single person is qualified to manage it. You must posses a full understanding of music composition as well as its place in culture. You should have the knowledge of how a data scientist goes about their work. And you have to have a keen observation about how consumers behave in the system.

Without any leg of this stool, the product will end up hamstrung. It cannot be managed by one human, unless you have a consumer driven, musicologist, data scientist on staff (not bloody likely), therefore it requires a team of experts to tackle the problem.

Each will bring an expertise and needs to trust other members of the team. Success should be judged on results and data; not taste or perfect code.

  1. Match Curation to the Taste of Your Listeners

This one is easy to say and hard to pull off. Curation should closely mimic the usage in your system. While a marketing approach will influence who your listeners are, good old data and analytics should be fastidiously monitored and results fully understood by the team.

A curatorial staff must adapt their approach to what the listener is doing, and what brings more value to their experience. And above all, it’s about your listeners’ tastes. Not your own.

Tim Quirk, my former boss at Rhapsody and formerly Google’s global content programming head, authored the objective approach to editorial that we practiced heartily at the service. He recently posted a series of tweets that questioned the practice of tastemakers being the lead programmers at services and believes that curators should function more like ‘park rangers than gatekeepers.’ “Yay curation. But boo anyone who thinks he or she knows better than you what you should listen to,” Tim summed up.

  1. There Is No Finish Line

The algorithm will constantly need to adapt to the music, the customer usage and the technology. Likewise music trends change over time. After all, few could have predicted the amazing rise (and the fall) of EDM? As long as you have music, you must have a team who lives and dies to have the perfect music catalog, the algorithm and the curation to fully create a great music experience.

The promise

The first generation of streaming services focused closely on catalog and access. We’re nearing the end of this era, as pretty much everyone has the same catalog and the apps are very similar. The next phase will focus on the music experience of the services. Curation, whether lovingly hand-crafted by humans, or processing massive amounts of data crunched down by an algorithm, will be the battlefield all the services will vie on over the next couple years.

We can already see this battle taking form as ‘the humans’ vs. ‘the geeks.’ That’s a mistake. A company needs to seamlessly blend these talents together to build curation that listeners will enjoy and create true value.

More Curation on Curation

Billboard What Apple’s Hiring of Zane Lowe Signals for the Company’s Music Strategy

Hypebot Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

Music Ally Apple Hiring for iTunes Role with ‘Specific Expertise in Music Journalism’

Business Insider What We’re Hearing About The New Music Streaming Service Apple is Developing in Secret

The Roaring Mouse: Rhapsody Faces Its Future

Mark Mulligan recently commented on an announcement from Rhapsody that trumpeted the Seattle-based granddaddy of streaming music’s impressive growth over the past couple years.

His analysis:

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago. 

Surprisingly, Mark’s blog piece was extremely thin on the particulars about Rhapsody’s turnaround. I was surprised as he is one of the sharpest analysts in digital music.

Rhapsody’s growth is impressive. But the seeds of Rhapsody’s recent growth were sown years before Columbus Nova showed up to the party. When the company spun out as a standalone entity from its parent, Real Networks, it was given a few on-air marketing dollars from its other owner, Viacom Networks. Previously Viacom had poured hundreds of millions of dollars in advertising credits to Rhapsody, which it used to advertise the service on MTV, Comedy Central and other on-air properties. The efficacy of those dollars was questionable, as the company had around 800,000 paying subscribers. It was just too early to market on-demand music to a mass audience.

After the spin-out, Rhapsody was left without a sizable marketing budget nor the money to invest in a free tier like Spotify or Pandora. So the company was forced creatively figure out how to attract customers. One of the hardest things streaming services faced then–just like now–is getting consumers to plop down their credit card to pay to them. The president at the time, Jon Irwin. opted to partner with companies who already had access to credit cards—cellular carriers.

Precarious Partners
Before we get into that, here’s a little bit about the economics and goals of partnerships between carriers and music services. These kinds of deals have been seen by the music industry as the answer to building mass audiences of subscribers. Customers might ask themselves why they are paying $10 a month for Rhapsody, but if the charge is included in their cellphone bill, they might never see it. It’s always considered better to tap someone else’s customers than build your own.

Deals like these are extremely difficult to navigate. Labels are terrified of offering discounts for the service, which is a requirement to get carriers to agree to the deal. Carriers are reticent to pay for content that customers may or may not use. And everyone wants someone else to take a margin hit. It’s up to the streaming service to get everyone on board and craft a deal that will be successful.

The best deals are ones where all parties–and the consumer–are happy.

Sometimes it works, sometimes it doesn’t. A couple terrible examples: Deezer has built a massive worldwide audience of paying subscribers, and yet the rate of people who actually use the service is pathetic. Mark Mulligan reported that it could be as low as 20 percent. A low active rate infuriates subscribers and, therefore, carriers. While there will always be some level of inactives in a service, when it becomes huge, you aren’t building a distinct brand and service. Muve Music, which previously was offered through the Cricket pre-paid cellphone service, also had massive inactive users and really awful economics due to licensing deals it signed with music labels.

It’s critically important to build the right offering when selling the service. Music services on carriers come in two varieties: a bundled offering and a bolt-on service. In a bundle the consumer is buying a tiered plan that includes the music service. So for $70 a month, you subscribe to the Cellphone + Music and a bunch of other services. The bolt-on is much simpler and cleaner: add music for $5 or $10 a month. As a product guy, I much prefer the bolt-on. Why? Most of the inactives reside in the bundle and all those people represent a time bomb just waiting to blow up. Customers who quit in droves are expensive for everyone, but it tolls the death knell for the service.

And that’s the weakness with the marketing and distribution partnership through carriers. Specifically:

  • Sure the music service gets the massive benefit of not having to capture the credit card, but it also cedes control of the relationship with the customer.
  • With two parties involved, the company’s already thin margins selling music get deeply eroded, requiring the music service to rely on its own retail customers to prop up the distribution costs.
  • The service is completely reliant on the carrier to market to their customers, and the carrier may not be very motivated to do so.
  • The service can quickly lose brand equity, as the carrier might just call the service ‘Comes With Music’ instead of promoting its brand. If the customer is just subscribing to a generic music service this is a very bad thing, as the carrier could replace it at any time.

So the music services must walk a fine line:

  • Build and hold onto a strong brand presence that will motivate the carrier to do the deal in the first place.
  • Make sure the carrier does the right thing in selling the service and focus on the brand.

Do it wrong, and you end up like Muve Music, which AT&T sold to Deezer at auction prices earlier this year after acquiring what was left of the struggling Cricket Wireless. Do it right, and hockey stick growth follows.

A former colleague thought the relationship between the powerful carriers and little music services reminded him of a blend between Aesop’s fable about the lion and the mouse and the Roald Dahl story about the crocodile and the dentist mouse. In my colleague’s telling of it, the powerful and hungry lion wants to eat the mouse, but to do so will ruin his only hope for repairing the tooth. So the mouse has to convince the lion to not eat him before he can fix the tooth. I’m sure you can imagine who is the lion and who is the mouse.

Dialing Up Deals
After months of negotiations, Rhapsody announced its first partnership with the pre-paid carrier MetroPCS in 2011. In the next few years the company announced deals with European carriers, followed by a global deal with Telefonica and then T-Mobile’s offering.

So far, so good. Solid growth. But it’s an open secret that Rhapsody’s brand has been fading for quite some time now. And the partnership strategy isn’t helping develop a strong brand identity. In their thirst to make the deal, the company is making their brand look more like a quilt than something unified. The service is known as Rhapsody on MetroPCS, Unradio on T-Mobile, MTV in Germany, Napster in Greece, Spain, Sonora in Latin America.

It’s an open question if it will be able to maintain its presence with Spotify taking up all the oxygen in the room with customers while YouTube Music Key and Apple’s iStreaming launches. The company has faced issues before and has been written off time and time again. It remains to be seen if it can grow, in particular in the U.S.

As the partnerships ramp, expect the company to face downward margin pressure. Those thin margins will start to eat into the overall revenue of the company. Growth is fantastic, but it could also harm the company’s bottom line.

Maybe even more important, the company needs to answer the hard question about what position it seeks to occupy in the marketplace. There probably is room for a white label music service that works well with big distribution partners like carriers and cable companies. But without a solid brand and a strong direct retail subscriber base, the company could start to see more pressure to deliver meaningful value. It’s far from clear if a mousy little Rhapsody can roar in a den full of lions.

Disclosure: I worked at Rhapsody for nine long rewarding, frustrating, awesome and ridiculous years before last year’s layoff.

More Rhapsodizing

Music Industry Blog: How Rhapsody Became A Top Tier Player Again

Music Ally Rhapsody’s Napster expands across Europe and plots ‘laddered’ pricing strategy

Billboard Why Streaming (Done Right) Will Save The Music Industry

GeekWire Rhapsody Tops 2.5M Subscribers, Up 60% From Last Year

2015 Digital Music Predictions

The past year was a doozy for digital music. We saw Beats Music come and go with a rush, Spotify grow significantly and digital track sales hit the skids as streaming continued to grow in popularity.

And for everything that happened, 2014 probably will be remembered as a transitional year. Big players like Apple and YouTube have yet to really show their cards. The impact of Spotify as a worldwide music platform has yet to really take hold. Many existing services still continue to solider on, despite significant changes that have impacted the marketplace.

The next 12 months will see a significant reshuffling of the deck of existing companies and new entries. We might also start to see the outlines of the future as the next generation of music companies start to debut. Because one thing that remains constant: there’s always someone who will invest in digital music, regardless of the financial results or past performance.

My picks for the top stories for 2015:

Say Goodbye: At Least Two Services Will Consolidate

We are moving quickly from a startup world into one where the big boys are playing. Apple and YouTube will join Amazon and Google Music Play All Access as the giants. While I have grave misgivings if their product offerings will be very good, it might not matter. With access to their digital stores, consumers might just activate the AppleStream or Music Key apps just because it’s simple.

Other companies will find themselves at risk, especially those who are forced to market their services directly to consumers. Rdio, Deezer, Wimp (Tidal in the US), Rhapsody, Slacker and a host of others will come under pressure to find alternative ways to market to customers, band together or go the way of other failed services.

YouTube Music Key Will Deliver A Flat Note

YouTube has the biggest opportunity to grow paid streaming products. YouTube has a massive audience, which is great. But their audience has been conditioned to consider the service free. There are signs that Spotify has already cannibalized YouTube’s consumers who want to pay for music, which might make it even more difficult for the company to get people to pay.

Because of this, YouTube’s paid subscribers will disappoint the industry during 2014. It might take a year or two for the company to perfect the product and find those who really want to pay for the service.

Apple’s streaming service will be a mess, and it won’t matter

The Cupertino geniuses do many things well. Streaming music has not been one of them. While it has the team from Beats Music to rely on, the company is known to ignore new talent acquired and turn it over to their internal team.

It wouldn’t be surprising to see their streaming service follow the iTunes Radio, which was supposed to be a Pandora killer, but just attracted those who use it because it’s already installed on their device. The company will get it right eventually, but streaming services are a completely different beast than anything it has tried. So expect some serious growing pains.

But because the service will be pre-installed on so many phones, it will sign up loads of customers through in-app purchase. Apple is also pressuring labels to lower the monthly cost of streaming, which could lead to solid growth.

Spotify Will IPO and More Artists Will Window

It is really difficult to judge how the public market operates and many things could happen that could affect Daniel Ek’s IPO prospects. We could see a downturn in the economy. Tech stocks could hit the skids again. The market might not like the prospects of the company’s future when it starts releasing business performance and data. But if Spotify overcomes all these hurdles, it will get its IPO out.

And regardless the stock price, a successful IPO will make many of its employees and early investors a lot of money. Expect to see a backlash from artists after this event, with more and more holding back new music on the service to give retail channels first shot at making money.

Pandora Will Become Musicians’ Most Hated Digital Service

Of all the companies in digital music today, none shows the most contempt for musicians and songwriters as Pandora. While the company has had some outreach, it also has tried to bend itself into a broadcast service to get a lower rate, decided to not pay a single dime for any song released before 1972 (as did XM Sirius), and then had the balls to countersue the ‘60s era group Turtles for violating its first amendment rights.

Pandora is already facing a firestorm for its exceptionally low payments to songwriters, but continues to aggressively lower royalty costs, regardless of how it affects its relationship with artists. While much of the money Pandora is trying to save goes to big corporate conglomerates, it’s the independent artists that always come to the forefront in these stories. Expect the hate to expand in 2015.

Amazon Will Continue To Play Its Game

Seattle’s commerce behemoth will focus on what it always does: keeping its customers buying more stuff. Many expected Amazon to offer a premium service in 2014, but instead the company created a back-catalog offering that kept customers in its Prime service longer.

The company had a rough 2014 with its failed Fire phone launch. While its nose is bloody from that setback, don’t expect that Jeff Bezos’ company will change its game plan. Focus on the customer buying: regardless if it’s a digital download, diapers or dishrags.

2014 In Review: Some of the best stories from the past year.

The Elephant In The Room: Another Cultural Landslide’s very complex and very loooong analysis of streaming music, discovery and the listener.

Streaming Report Card: Music industry analyst Mark Mulligan gives us a rundown on how streaming did in 2014.

Stop Blaming The Internet: Gang of Four’s Dave Allen gives a deep dive into the issues surrounding streaming and artists.

The Streaming Price Bible: David Lowrey’s in depth look at who’s paying what. While I might quibble with Lowrey about why those numbers are so low, the streaming rates on this post is illuminating and depressing.

The Album Cycle: Consequence Of Sound News Editor Chris Coplan looks at the nature of music promotion as the industry is changing.

Five Reasons The Music Industry Hates Pandora The Most: Music lawyer and blogger Jake London lays it out.

Spotify Has Six Years Of My Music Data, But Does It Understand My Tastes: Stuart Dredge digs into the taste profile.

Taylor Swift Announces A World Tour And Pulls Her Music From Spotify: Ben Sisario on everyone’s favorite spatting couple.

The Battle for Relevance: Apple and U2 Fight To Regain Their Mojo

The legendary band U2 came on stage at the end of the Apple Extravaganza that introduced the world to a pair of iPhone 6 models (big and freaking huge I think are the product names), Apple Pay and the Apple Watch. The band’s had a rough go of it recently. Their last release, No Line On The Horizon, disappointed both fans and critics and it seemed like they might have lost their relevance.

This is a band that has defied age and found ways to make themselves new again and again. Had time finally caught up with the band? Potentially, and it frightened them. Bono was quoted saying U2 didn’t want to be a heritage act. Being contemporary was much more important, he said. But it wasn’t easy. “To be relevant is a lot harder than to be successful,” he told the Hollywood Reporter. So making money isn’t the way the band judges itself. After all, U2’s latest tour broke records in terms of attendance and revenue, yet they still craved relevancy.

So the band made changes. They holed up with super producer Danger Mouse and poured themselves into the making of the new record. That was almost two years ago.

Why the delay?

The band took time to get the recording right, bringing in One Republic’s Mr. Everything Ryan Tedder and Adele’s producer Paul Epworth to assist in the making of the record.

Just like U2, Apple also has had a great run of success, but it appears they’ve been losing their relevancy. Tim Cook’s company is the richest in the world, and has shown the ability to deliver amazing profits. But that’s not the way he is judged. Tim still stands in the shadow of Steve Jobs as most of the company’s products since he took over the company are just iterations (are they truly improvements?)of the same product line. Meanwhile the world is catching up, and some may argue, passing the company (Samsung anyone?).

Tim’s plan to recapture the Apple magic has centered on the wrist. The company has invested heavily and spent a great deal of time incubating its watch. It has waited until Tim deemed the product was right and a mass number of people would want to wear it before they revealed it to the world. So in the wake of finally seeing the watch on Tim’s arm, how did the company do?

Hip To Be Square

Square is the new round for Apple.
Square is the new round for Apple.

The first visceral reaction to seeing the square-ish watch was one of disappointment. The form factor wasn’t all that different than artist mockups that have been circulating. Jony Ive had reportedly been bragging about how Swiss watchmakers were “fucked” because of the Apple Watch design, but it seems a bit bulky and much more masculine than expected. I have written that one of the musts for the company was to appeal to the female consumer, and the Apple Watch looks like it may overwhelm a woman’s wrist and underwhelm their demand for the timepiece.

What went wrong? Apple certainly made extremely complex technology back in the day. But when it came to showing that to the world, Jobs with without equal. He could find a way to find the few things a product did really well that connected with people. He innately understood desire and insisted the products showcased those. Complexity was hidden underneath the hood in favor of those few items that Steve told us were ‘awesome.’

In stark contrast we were shown the apps screen on the Apple Watch, which looked like a jumble of tiny icons and reeked of “technology” rather than useful features. Later in the demo, VP of Software Kevin Lynch geeked out on a watch face that placed exactly where we were in the solar system. Excuse me for saying this, but that’s fucking stupid. I know there are people who really care about such things, but do you really need that strapped to your wrist? To highlight that in a demo really tells me the company is having a hard time understanding why people need—or even want– the product.

Later, Tim came back on stage and kept referring to the Apple Watch as the most intimate product the company has ever produced. At first I had a hard time understanding Tim’s emphasis on intimacy. After all it’s not really a user benefit. Unless you are talking about massage creams or sex toys, does referring to intimacy really matter?

An Intimate Affair
Most likely the intimacy of the Apple Watch has been the rallying cry within the company. It’s a code word to remind everyone that the watch has to rise to a different level of value and importance if Apple expects people to wear this device on their wrist. It’s very important to product managers—not customers.

And that’s been the fundamental difference with Apple. Before there was simplicity and elegance and now it has been replaced with overwhelming features and options. Yesterday Kevin talked about the options a user had in customizing the watch screen. He showed off different watch faces with different features and colors. That’s very cool, but certainly not something that needed to be presented. Tell me why I need the watch. Not how I can bling the watch.

With all this said, I don’t believe the Apple Watch will be a bomb. Obviously, it will have its fans. And it’s not like the presentation of the iPhone really made the product a hit. The first generation iPhone came out and people went nuts for it when they saw it in action. It became a must-have device. We’ll see when the first customers start to use it and perhaps find they can’t live without it. But a breakout hit that makes the company the envy of the industry? Not from what we saw yesterday.

A better bet might be Apple Pay, which looks like it could potentially simplify the purchase experience and disrupt mediocre services like PayPal and Square. It does require an iPhone and a battery life, though. So yes, you might need to charge before you can charge.

And what of U2? Can Bono and his mates recapture their glory? Perhaps. But giving away your album (even if you are getting paid big bucks for the privilege) to every iTunes user in the world seems like you are cheating your way to relevancy.

 

Some Of My Favorite Tweets From Yesterday’s Apple Watch Presentation

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Wearing It Well: Can Apple Turn Wearables Mainstream?

A version of this first appeared on Re/Code

By South by Southwest standards, it was early. Obscenely early. But there we were, tromping out of our hotel into the unusually foggy morning, mere hours after falling into bed, ears still ringing from a band that had sounded excruciatingly like all the others we heard for the past 12 hours.

Hugging our coffees close (no Starbucks line at 8 am during SXSW Music!), we marched down the street and queued up outside a venue. Why were we in line so early? The sports giant Nike was taking a huge step forward in the wearables industry with the release of its Nike FuelBand. And we could be some of the first people in the country to purchase one as part of its launch program; the company sold 100 per day at the festival.

We were greeted by our own personal Nike rep, who guided us into a venue that had been transformed into a glitzy FuelBand showroom. He showed us the FuelBand, and helped us set ours up. We then went out into the world to try our hand at the “quantified self” movement, where you collect metrics of everything you do in your life. Nike’s own metric, “Fuel points,” would let us measure our activity and compare it to ourselves and friends.

Get me Jonny Ive now!
Get me Jony Ive now!

Two years later, almost to the day, I recorded my last Fuel point. I had long ago stopped caring about the metric, for a variety of reasons: The band didn’t capture all my activity, it wasn’t very accurate or sensitive to movement, and it wasn’t based on anything that brought meaning to my life.

But the main reason that was my last Fuel point day was that the damn thing had stopped working. I got the dreaded “801” code, which required a trip to the Nike store for replacement. This had happened repeatedly — six times since that day in March.

That was enough for me. I left the device on my desk and never picked it up again. I found that the untracked life wasn’t much different from my tracked life. The only difference was that I didn’t have a watch, which is primarily what I had used on the band.

I wasn’t alone in giving up on the FuelBand. And I’m not just talking about customers churning like me, though my guess is that there are a lot of us. In April, Nike announced that it was discontinuing the device, firing the entire FuelBand team and focusing on “other digital initiatives.”

Even with Nike’s big failure to capture the imagination of the active world, wearable computing is still considered the next huge growth area in technology. Credit Suisse sees it growing from $5 billion in 2013 to $30 billion by 2018. IDC says that companies will sell more than 112 million devices by that year.

It may be the right time in the technology cycle for wearables, too. Sensors of all kinds are smaller, cheaper and much more accurate. Displays are smaller, and even flexible glass looks like a possibility soon. You can imagine that a device with multiple sensors could find ways to track your fitness, as well as providing location-aware features like mapping, shopping and even banking.

Not only would wearables expand a company’s device portfolio, if it sells enough of them, but these firms will have access to all kinds of big data, with enormous amounts of real-time information that could be used for everything from personal communication to advanced location-based commerce. Big, big data.

Wearing out its welcome

So far, though, companies have failed in making wearables something people want to, um, wear. Most of the products have been either for geeky early adopters of new technology, or for hobbyists who absolutely need the data, like triathletes training for an Iron Man event. Sure, there have been technical problems, as well as a couple of health scares with the devices, but the two core issues these gadgets face going mainstream are their design and the product’s value.

Maxwell
Would you believe it’s checking my heartrate?

Designs have reflected the technical bent of products. Most look more like what you’d expect in “Minority Report” than what you’ve ever seen in a high-end watch store. And the generally bulky form factor lacks appeal for women, who have been underserved by most wearables so far. While the FuelBand may have been a bit different, it’s kinda just a souped-up Livestrong bracelet. In my informal and nonscientific customer reviews of wearables, most of them aren’t something an average customer wants. And don’t get me started on Google Glass.

Outside of the design — and maybe even more core to the problem — there doesn’t seem to be much demand for the features touted by the wearables manufacturers. If you start with the standard product-manager mantra of “What problem does the product solve?” there’s not much you can pinpoint. Most wearable devices track activity, but not really uniformly or correctly. Some, but not all, track sleep. The Samsung devices combine some fitness tracking with phone connectivity, but they’re cumbersome. And ugly.

You want to attract the attention and the interest of mainstream consumers? It had better be something people really want. And no company has been better at turning technology into desire than the big one: Apple.

Apple’s wearable moment

It’s clear that Tim Cook is betting big on a suite of wearable products. Bloomberg reports that the company has more than 100 designers working on a device. They’ve hired professionals from the fashion industry, the medical industry, the fitness industry and watch brands, as well as sensor experts by the dozens. All to work on what has been described as a luxury, high-fashion wearable device that will allow customers to communicate and track their vital information, including location and health-and-fitness metrics.

This isn’t the first time that Apple is entering a field where many companies have tried and failed. There were many MP3 players before the iPod, millions of phones before the iPhone, and even tablets before the iPad. It’s an Apple specialty to create something really valuable out of others’ failures by picking the right time, and creating an ecosystem that didn’t exist before. Apple doesn’t invent as much as it perfects.

Wearables pose a bigger challenge. Instead of a single strong compelling value (think “1,000 songs in your pocket”), the iWatch looks like it will package an assortment of features. And unlike the iPhone, which replaced three devices (phone, music player and Internet portal) with a single unit, it’s unclear if the iWatch will replace anything customers already use. At its core, the main purpose of the iWatch appears to be that it will gather data and work well with the iPhone. That will have value to some, but will it be enough to drive the industry to the estimated numbers? I can’t say that it’s a slam-dunk.

Five musts for the iWatch to be “ready to wear”

So, what would it take to make the upcoming device the breakthrough hit that Tim Cook craves? Forgive the impudence, but here are a few categories that Apple must nail if they expect to build the market:

  • It must be fashion-forward. Outside of the Nike FuelBand — and, some might argue, the Misfit Shine (I wouldn’t — I think it looks like it was issued by the CIA) — most wearables are terribly designed, at least if you consider reaching a mass audience. Apple is clearly investing in talent here, but the company needs to deliver the goods on a stylish watch that men and women wouldn’t be embarrassed to wear. This isn’t like any market Apple has entered, as the watch will be compared to classic brands like Tag Heuer, Rolex and Swatch. Jony Ive had better bring his “A” game.
  • The user benefits need to be clear, concise and limited. It has to be instantly clear why you need this device and what its main purpose is. Over the past few years, Apple has gotten away from the simplicity of its marketing pitches. There has also been an annoying habit of throwing in a bunch of half-baked products (Passbook, anyone?) well before they were ready for prime time. The watch can’t have any of these issues. My product-manager adage of “How do you want users to describe your product?” applies here. It must be crystal clear.
  • It has to work. Consumers will forgive many issues. But inaccurate recording or even fine-tuning of the algorithm will drive users nuts. In retrospect, the FuelBand’s problems with activity spelled its doom. After all, if Nike couldn’t monitor activity correctly, what the hell could it do? Apple will be held to a much higher standard than Nike. So what it tracks, and the way it tracks that data, must be baked by the time it ships.
  • Apple must be very careful with the information it tracks. Let’s face it. People hate Google Glass. Part of the hatred is because the device is extraordinary dorkified (see the first “must” on this list), but there are also privacy concerns with tons of people walking around with a camera on their head. The iWatch apparently will gather quite a bit of personal and sensitive information. It goes without saying that keeping that information private and secure will be incredibly important. But it’s also paramount that assuring customers that the rules of engagement around health data in particular are clear, and will primarily benefit users.
  • It has to appeal to an influencer community. Who will lead the adoption of the product? Apple has reportedly been targeting athletes, which sounds like a page right out of Nike’s FuelBand playbook. Somehow that didn’t work for Nike, which could be blamed on product issues just as much as marketing. Making sure that the company targets the right kind of influencers will be just as important as its marketing pitch. I’m not quite sure that tapping only pro athletes will give Apple the vast appeal it seeks. Apple will need to reach into popular culture — like that Steven P. Jobs wannabe and Louis Vuitton designer Kanye West, as well as others who lead cultural trends.

The stakes are high for Apple and Tim Cook. The iWatch will be the first foray into a category outside of its core offerings since the Jobs era ended. But it remains an open question as to whether the company has the intestinal fortitude to ship the right product, or — if it doesn’t live up to the exacting standards of consumers — to cancel the project and do something else with its billions in the bank.

The Magic Numbers: How Apple Beats The Demise of Music Downloads

There are two numbers that you need to pay attention to in order to make sense of Apple’s breathtaking acquisition of Beats Electronics. Neither of them is the rumored $3.2 billion price. They are 13.3 and 800 million.

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Apple’s saint Steven P. Jobs  said customers wanted to own their music. Not anymore.

The first number is the percentage that music downloads have decreased in Q1 of this year compared with 2013. This is on the heels of a 5% decrease last year, so it’s looking like the decline is picking up speed. It’s pretty clear that the download era is waning and Apple knows this better than anyone. I’m sure the company has a phalanx of data analysts poring over projections and understand that the rate that customers buy downloads might not be in a freefall, but it could be coming quicker than anyone expects.

It’s pretty clear when it comes to the choice between buying downloads or using a streaming service, customers are beginning to choose streaming. But so far, Apple has sat out of the subscription music trend. After all, the Book of Jobs says that customers wanted to own rather than rent music.

Those days have passed. Apple needed to hedge their bets and get into streaming. But instead of building another bolt-on to iTunes as the company did with their underperforming radio service, Apple decided to speed their way to market by purchasing a hot new service that had a lot of buzz, but hadn’t scaled so much that it was prohibitively expensive. Beats is the most viable of all acquisition targets.

While music purchases may be falling, it’s still a big business for Apple. So instead of creating another option in iTunes that would potentially cannibalize download sales, why not just buy a service and keep it separate? Streaming blows up: Apple wins. Streaming doesn’t pan out, well, it will still have the iTunes store chugging along.

In The Cards

The second number refers to the 800 million iTunes accounts, most with credit cards on file.  Those credit cards are the keys to the kingdom for anyone who wants to sell something in the store. Apple charges a 30 percent premium for companies to use their in-app purchasing system, where a customer can subscribe directly from the native app.

After Beats Music’s troubled launch period didn’t produce many subscribers from the 7-day trial, company executives were calling around to see how other firms dealt with the 30 percent Apple tax (answer—you eat the $3 per customer a month).  In late April, Beats launched in-app purchase and the results were stunning. Their iOS app became the number one overall free app.

Just as important as in-app purchase is getting featured in the iTunes store. Placement in the iTunes store can make a hit out of an app and can mean hundreds of thousands of downloads. Combined with in-app purchase, the store is a kingmaker that can make or break a company. So once Apple integrates the Beats app, it wouldn’t be surprising that the app will get a permanent featured position in the store. Cha-ching.

Oh, and that $3.2 billion price tag? With Beats Electronics’ hardware business already creating significant profits, Apple’s purchase price could be covered within a couple years. So in essence the company is getting into streaming music for a song.

More Acquiring Minds

FT: Apple In Talks to Acquire Beats

Re/Code: Why Apple Is Betting Big On Beats

Om.co: On Streaming: Apple, Beats & Spotify

Apple Insider: Jimmy Iovine Set To Join Apple?