More than a decade ago, the music industry was in crisis. Songs were being passed around the Internet illegally free of charge. CD sales were in decline. So major labels and musicians embraced Apple, which convinced consumers to open their wallets again by buying digital songs through iTunes.
Now again in turmoil, the music industry is looking once more to Apple, which launches its new $10-a-month streaming service Tuesday. The challenge this time: Find a solution for the industry as it struggles with Web sites that are legally streaming songs for free online.
With its paid service, Apple will go against the grain of these proliferating sites — which partly fund themselves by requiring consumers to hear a few ads once in a while. Google, which has 1 billion music listeners through YouTube, introduced its own free streaming service last week. Pandora, the early streaming specialist, has 85 million listeners, and Spotify has doubled the number of its nonpaying users to 75 million in the past year.
The trends are a source of deep unease in the music industry, which would see a drastic change to its business model if it had to largely rely on advertising for revenue, rather than song sales.
“We are at an important inflection point of the evolution of music,” said Larry Miller, a professor of music business at New York University’s Steinhardt School. “After more than 15 years in digital music transition . . . only Apple has the potential to push streaming — paid streaming — into mainstream adoption.”
Apple is coming relatively late to the scene, but the tech giant arrives as labels and musicians have been searching for an alternative to Spotify. The privately-held firm was actually once championed by the music industry as an alternative to Pandora, but is now feared as it sees exponential growth.
After months of negotiations with music labels and artists big and small, Apple committed a vast marketing budget for glitzy TV ads and direct marketing to the hundreds of millions of e-mail accounts it holds. It also promised slightly better royalties to artists than Spotify and other streaming partners, according to people familiar with the company’s plans.
And in a departure from its rivals, Apple promised to strictly enforce its policy that users must pay after a free, three-month trial.
“Apple is generally positive for artists in getting better pay because subscriptions pay about seven times as much as free services do to artists,” said David Lowery, a member of the bands Cracker and Camper van Beethoven and a lecturer in music economics at the University of Georgia.
“But we don’t want to create another monopoly where we end up like authors did with Amazon. What we want is more options,” Lowery said.
The stakes are just as high for Apple, which for the first time saw music downloads decline on iTunes for the first time last year. Two-thirds of U.S. consumers, meanwhile, are listening to streaming music each week, according to Nielsen Entertainment research.
When Spotify first launched in the United States in 2011, the three major music labels — Universal, Sony and Warner — threw their support behind the company and took equity in the privately-held firm. Spotify chief executive Daniel Elk pitched the labels, saying most users would come first as free listeners but then become hooked and eager to pay $10 a month for the service’s premium tier, which is ad-free and gives users more control over what they hear.
In a May earnings call, Warner Music chief executive Stephen Cooper reiterated the importance of getting users to start paying. “We continue to believe that the long-term sustainability of the ‘freemium’ model is predicated on high levels of conversion from ad-supported ‘free’ to paid subscription,” Cooper said. “Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings.”
But in the last four years, Spotify has struggled to grow its paid service. Almost all new users started out with the fee plan, but only about 20 percent to 30 percent of them became paying customers, according to industry executives.
Privately, music labels began to express frustration. Spotify wasn’t putting enough money into marketing its premium service and didn’t collect credit card numbers of new users to ease the transition to the premium tier, executives said. They complained that Spotify, preparing for a public offering, appeared more interested in bulking up its overall user numbers to impress investors than generating revenues that could be passed down to labels, writers and musicians.
“The irony of it is that there is nothing more that we wanted than to make Spotify a significant player, but what happened was that Spotify revealed its true colors — that it is no different than any Silicon Valley company that wants to build a whole business on audience and not subscribers,” said a music industry executive who spoke on the condition of anonymity because of ongoing relationships with streaming providers.
Apple and Spotify’s recent dealings with Taylor Swift was also telling, two music industry executives said.
Earlier this month, Taylor Swift complained that Apple wasn’t paying artists for their music during the new service’s three-month free trial period. Apple quickly agreed to reverse its policy.
But in November, Swift said she would keep her “1989” album off Spotify because she believed the company’s free tier of ad-supported streaming would never make enough money to support artists. She insisted her album “1989” should only be available to subscribers of Spotify’s premium tier. Spotify, however, wouldn’t budge; the company said it was sorry to see Swift leave.
“Our feeling was that Spotify is too entrenched in very simple principles. They said they would never put anything just on premium and were unwilling to take a nuanced approach,” said one industry executive who spoke privately to protect an ongoing relationship with Spotify.
Spotify disagrees that it hasn’t grown the number of paid users quickly enough.
“Nobody is more interested in driving subscriber growth than we are. Nobody has more data about what works and what doesn’t, and nobody has had anything close to our success in actually getting people to subscribe,” said Jonathan Prince, a spokesman for Spotify. “The numbers speak for themselves — 100 percent growth from 10 to 20 million in just a year, the highest conversion rate of any ‘freemium’ business, whether it’s music, video, news or games, and orders of magnitude more subscribers than any of our competitors.”
Cecilia Kang is a staff writer covering the business of media and entertainment.