Slicing Apple Music – Part 1: Will It Kill Spotify?

As is now widely known, Apple Music is comprised of three key elements: iTunes – but on demand and in the cloud (a la Spotify), a worldwide radio station, and a social network that connects fans to artists and their content in whatever flavor it exists.

I’m going to analyze each of these pegs in Apple Music’s new stool. One at a time. Today, the on-demand piece.

When Apple introduced the iTunes store in 2003, there was no elegant (let alone legal) ecosystem for getting the songs you want online whenever you wanted them. It was truly the Wild West, outlaws and all.

Cut to 2015….

A whole new generation of consumers. A dozen years of technology and behavioral evolution. A smattering of dominant, influential competitors giving millions of people the music they want the way they want it, give or take.

It is, in other words, a different world. And that’s the world into which the new Apple Music has been born.

Those who argue that “Apple reinvented the music industry in 2003, so it can do it again in 2015″ must recognize that now is not then.

Apple solved big problems in the space in 2003. But today, the biggest problem it’s attempting to solve is “what do we do to stem declining revenue from the iTunes store?”

To their credit, Apple is famous for crafting integrated ecosystems where the sharp lines between product categories fade away in the presence of a user experience focused on consumers, as long as that experience can live within the four corners of the Apple’s OS. That attention to detail and a quality experience is certainly on display with Apple Music.

But here’s what people in the audio space really need to understand about Apple Music: It is a solution to the problem of music commerce. The success of Apple Music will be directly related to its incremental contribution to Apple’s coffers, and that contribution will come largely as a result of the sale of individual tracks or monthly subscriptions.

PiperJaffray estimates that Apple Music will add less than 1% to revenue in 2016. While that’s a drop in Apple’s bucket, if Apple Music can stem the fast-eroding pace of online download sales that would be a big win both for Apple and for the music industry.

So make no mistake: Music commerce is the definition of success for Apple. Not countless listening hours, not siphoning attention from radio, not even reach per se. And certainly not revenue from advertising, a.k.a. spots. Music sales and music sales only.

Even in a growing market of music subscribers, one has to assume that Apple’s success must come at the expense of Spotify to some degree, yet Spotify has such a huge head start and such an intense consumer focus, if I were Spotify I would double down on technical innovation and customer experience and deflect most of this challenge altogether. And that’s what I think they will do.

Meanwhile, this is a glancing blow at best to Pandora, where the content is virtually all free and ad-supported. In other words, a different market entirely.

Still, Apple has hundreds of millions of mobile devices worldwide and the credit card numbers of 800 million consumers. Not to mention enough cash to effectively sell ice to Eskimos.

But to anyone who thinks that Apple Music is necessarily a Spotify-killer and that anything Apple touches turns to gold, I would point out that iTunes Radio has been in existence for two years now and you have never seen a report on how healthy its usage is. Why? Could it be because that usage is disappointing? Why yes it could be.

Personally, I think this is a great time to be both Pandora and Spotify. Apple’s intense promotional glare will shine fresh light on the streaming audio space and bring new audiences to that space where they will be free to sample the wares of Apple and its competitors. The rising tide will float all boats.

Meanwhile, what do we make of this dream of the music labels that all consumers will buy music by subscription and the days of consumers streaming music for free will pass into history like the 8 track tape?

It’s time for a dose of consumer reality, music labels:

At the music industry’s peak in 1999, the average music consumer spent only $28 a year. Last year, Apple found that the average iTunes user spends $48 a year on music. And therein lies the conundrum with paid streaming services. By all rights, $10 a month — or even $20 a month — for access to virtually every song ever created is an unbelievably great deal. And yet, when the average consumer is only willing to spend at most $48 annually on music, $120 a year is way overpriced.

So while nobody expects every consumer to line up for Spotify or SiriusXM or Apple Music or any other subscription service, the fact that “average” consumers don’t spend even close to these price points illustrates that no matter what the labels want, there will invariably be a market for free music because a large portion of that market will never pay for “all you can eat” access at premium prices.

For as long as I can foresee, that means there will be a market for free music and free radio, too. Even if, as some state attorneys general suspect, Apple is colluding with music labels to squash “freemium” streaming models.

The fact that music fans are the industry’s biggest spenders combined with Apple’s sales-oriented definition of success mean that Apple’s target is really not all music listeners or even all music fans. Their target is the super-fan – the super-spendingfan – the one who spends the most money on the music they love while the rest of us listen to radio or Pandora or SiriusXM or even Spotify’s free tier.

That’s just fine by Apple, and that will lead me to Parts 2 and 3 of this review: Apple’s worldwide streaming radio station and its new “Connect” service.

Mark Ramsey is a veteran media strategist, researcher, and trend-maker who has worked with numerous media, publishing, and digital brands.

You can contact Mark Ramsey by heading to his website markramseymedia.com