Digital players fight for music domination

Streaming services such as Spotify have left the likes of Apple looking outdated when it comes to free or low-cost music. But the big internet firms are ready to act.

Younger consumers prefer free or low-cost music services such as Spotify because they are reluctant to pay for songs. Michal Czerwonka / Getty Images / AFP

The international online music streaming services Spotify and Pandora are bracing themselves for a full-scale assault from Apple, Facebook and Google.

Although Apple controls 63 per cent of the US$2.9 billion US digital music market, it cannot afford to ignore the mushrooming popularity of the free and low-cost music services delivered by new companies such as Spotify. With its US digital music market share dropping from 69 per cent in 2010, Apple is reported to be anxious to offer its own extensive music streaming service.

At the moment, Apple still sells its music library to consumers via its iTunes services for about $0.99 per song. Ever since its launch, iTunes has been a phenomenal success, selling more than 25 billion tunes to the public. But the service is appearing increasingly outdated.

Younger consumers in particular are drawn to free or low-cost music services such as Spotify because they are reluctant to pay $0.99 a song to Apple to build their own music libraries. Instead, they prefer to access a free or low-cost choice of music via live audio streaming, which delivers straight to a smartphone or other internet-connected device.

The big internet players are now desperately negotiating copyright deals with the major labels in to try and enter the audio streaming market.

According to Adrian Drury, the principal analyst at the research company Ovum: "Apple, Google and Microsoft have and are exploring what such a deal structure could look like. It would be very different from, for example, the iTunes model today, which is a retail model."

In theory, the big players are ideally placed to dominate the digital music era as they are able to offer not only music but also video and other services, a process known as "bundling".

Rob Enderle, the principal analyst at the Silicon Valley-based research company The Enderle Group, said: "We are clearly entering a consolidation phase for the industry and I think providers who can address all media needs with a single offering - as Amazon, Apple, Google and Microsoft are attempting - will have advantages of scale.

"Their bundles will appear more attractive over one-trick ponies which will increasingly have to tightly target smaller more distinct groups of music lovers and/or merge or partner with video services in order to survive and compete."

Niche players such as Spotify and Pandora are vulnerable to an all-out assault from the IT giants, with their multibillion-dollar war chests. Apple, for example, is sitting on unused funds of about $147bn.

"This will get rather bloody over the next few years and I expect few of these firms will exit the decade without massive changes if they survive and many won't," predicts Mr Enderle.

However, companies like Apple may already have left it too late to enter the digital music streaming market.

Pandora, the US-based streaming service, for example, already has 200 million users in the United States. Last month, Spotify launched in eight new markets: Latin America with Mexico; Asia with Hong Kong, Malaysia and Singapore; and Europe with Estonia, Latvia, Lithuania and Iceland.

Spotify also has the backing of the music industry. Big record labels such as Universal Music are major investors in the Swedish start-up.

Music labels also need to be convinced that a new Apple streaming service, for example, would net them as much revenue as the existing arrangement where they receive 70 per cent of the sales for each song Apple retails. Switching to streaming their content would mean that instead of receiving $0.70 a song, the labels could receive only about $0.12, according to some current industry estimates.

There is evidence that companies such as Apple are finding it harder than they anticipated to reach agreements with the main music labels.

"Apple is trying to secure on-demand streaming rights from the major music labels, but understand this is not a process that has just started," says Mr Drury.

"This kind of streaming deal is going to be highly complex as both sides of the deal will be wanting to protect their business and limit any downside risk."

The jury is out on whether Apple, Facebook, Google and Microsoft may have come to the party too late. But even if they have, the biggest music revolution since the invention of the phonograph is already taking place.

Consumers across the globe are taking the IT industry's decades-old promise of delivering "anything, anywhere, any time" at its face value where music is concerned. Already, contemporary musicians are raising concerns that the precarious royalties they earn from the record labels may soon be swallowed up by the internet. The new digital music streaming revolution is also threatening the future of some of the world's leading internet players.

It now looks as if the only people to benefit are the world's consumers, who will have access to vast online music libraries for free or for a few dollars a month.