Beats Eectronics

More Competition Amongst Streaming Services as YouTube and Amazon Enter the Space

When 2014 began, I wrote that it would be the "Year of the Streaming Service." So far that predication is coming true—perhaps in ways that few of us ever anticipated.

Since that time, Spotify reached the 10 million-user mark. While that was no surprise, attaining that milestone served to solidify their position as the streaming service to beat.

Also, it wasn't much of a surprise that Beats Music launched—it had been expected for a while, and their emergence in the field was welcomed by many.

What is truly making 2014 out to be the Year of the Streaming Service are a couple of events that happened over recent weeks and a couple more that are shaping up now.

While it was no surprise that Beats Music launched, it was a major surprise that their parent company, Beats Electronics, would almost immediately get purchased by Apple. While that purchase included Beats' booming headphone business and will help reestablish Apple as a leading consumer electronics company, it will also help them become a force in the streaming marketplace.

Now comes news that services from YouTube and Amazon are launching.

The recent talk about YouTube's service has mostly focused on parent company Google's treatment of Indie labels and their licensing deals. Setting that aside for a moment, a paid streaming service from YouTube represents a way to leverage the enormous user base of what was originally a free video streaming service that has become a go-to music discovery platform. Though details of the new service are still emerging, being able to monetize all those subscribers through a paid, ad-free service will be a tremendous step forward for YouTube.

The other new service, from Amazon, was just quietly launched. Amazon Prime Music, available only in the US, offers "unlimited, ad-free streaming" of "over a million songs and hundreds of playlists." Because Amazon is advertising Prime Music as a free service, I might say that it is just another way for Amazon to increase membership in its existing Prime service by marketing the added value of streaming music. While the basic offering sounds pretty standard, what is even more interesting is how Amazon is partnering with other services, namely iHeartRadio, to provide further incentives to their users.

In addition, Amazon has introduced the Fire Phone, making both Amazon product launches much more significant. Consumers may not automatically switch to an Amazon streaming service if they already use one of the others. However, that chance multiplies when the Fire Phone and Prime Music are used together. And this synergy represents what Amazon does best: leveraging the company's scale.

Once associated solely with books, Amazon has continually developed new products and services. That strategy is now being applied to streaming music. As I wrote earlier about Apple buying Beats Music to keep iPhone users from leaving the company for another service, it would appear Amazon is attempting to do the same.

Amazon and Google both know their users, and their ability to serve streaming music to them means that expectations for what constitutes a streaming service will continue to grow. This expectation will further shape competition and encourage the other services to change their offerings and thereby strengthen the overall streaming business. In addition, Amazon's strategy of using Prime in conjunction with other services means they can build out without being a direct competitor, taking a little pressure off them while still allowing their business to grow.

A couple of new streaming services will only serve to increase competition and consumer choice. Both are good things in the continued growth of the streaming marketplace.

Apple Buys Beats

A big surprise to many in the industry occurred earlier in the month when news surfaced that Apple was going to buy Beats Electronics.

Questions swirled around the acquisition: What would happen to Jimmy Iovine, Dr. Dre and Trent Reznor, all executives of Beats? Would they become Apple employees? How would they fit in that culture? What about that dollar amount; does the valuation make sense? And which piece of Beats is Apple after? If Beats by Dre headphones are so maligned for their quality, why would Apple, known for being a pinnacle of design, want to add an inferior piece of equipment to their product line? Or do they just want the Beats Music streaming service that launched earlier in the year?

And given the infamous video of Dr. Dre and Tyrese leaking the news, many of these questions were posed from the perspective of "What could Apple be thinking?"

Apple was most certainly thinking about the nature of this purchase and how it would propel them forward. My thoughts:

  • Jimmy Iovine, Dr. Dre and Trent Reznor are all seasoned executives with insights into the music business developed over long careers. Their first-hand knowledge of both consumer electronics and streaming services—to saying nothing of music itself—will be a tremendous asset to Apple.
  • The valuation? Yes, the $3.2 billion price tag being talked about is very high: whole record companies used to get sold for amounts like that. However, consider that Apple has $159 Billion in the bank and that Beats had $1 Billion in revenue in 2013, and one can get some perspective on the purchase price.
  • Quality? It should come as no surprise that Beats by Dre headphones are not considered audiophile products. However, they have cornered the market on style and who's to say that Apple can't create an audiophile version at a higher price point? And if the kids who aren't buying music actually are buying headphones, doesn't purchasing a leading headphone manufacturer make sense?
  • As for the streaming service, Beats Music: Apple has never been a strong competitor in this space, and rather than trying to build a service themselves, purchasing one on the rise makes perfect sense. As I wrote at the beginning of the year, competition among streaming services will be key as they continue to refine their offerings and as consumers sign up in higher and higher numbers. Apple saw an opportunity with this purchase and took it. It was a bold, yet smart move to insure they get into the business now without any risk that they might fall further behind.
  • Something else to consider is that download sales are dropping. Apple virtually single-handedly created the download business by inventing the iPod and forcing the major labels to accept $0.99 per track pricing. If that revenue stream is drying up, and with consumers using their mobile phone to access music, Apple's strategy can now switch to one in which those consumers would use their iPhone to utilize Apple's own streaming service.

Apple has always been a very conservative company, one that has always considered its options and only rolled out a product when it was ready. While there might've been missteps along the way, there have been few. A purchase of this size would not have been entered into lightly, but all of the decision-making seems to be sound. Lately, Apple has just been a phone company; this purchase can make them dominant again, not just in the music space but also in the consumer electronics space.