Over the past two weeks, Apple Inc. (NASDAQ: AAPL) has indicated that its streaming music business, Apple Music, is taking dead aim at Spotify, currently the world’s leading streaming music service with more than 30 million paying subscribers. When first introduced last year, Apple Music offered a three-month free trial subscription to the millions of iPhone and App Store users for whom the company already had payment information.
That was a huge benefit for Apple and the company now claims more than 15 million paid subscribers to Apple Music, a testament more to the power of Apple’s huge user base than to anything unique about Apple Music. Spotify, a well-funded start-up unicorn, has recently run head-on into the Apple juggernaut.
The first recent issue was Apple’s rejection of an upgrade to Spotify’s iOS app that would have used Spotify’s own billing system rather than Apple’s. Had Apple agreed to the change, it would have cut Spotify’s payments to Apple at least by half. Because iOS apps are a gift that keeps on giving for Apple, the tech giant wasted no time spurning the revised Spotify app.
Spotify has been making its case in Washington and in Europe, and it has found some support. Senator Elizabeth Warren recently included Apple as one of several tech firms that use their hardware and software platforms as a tool to “snuff out the competition.”
A second issue popped up last Friday when Apple submitted a proposal to the U.S. Copyright Board that the company claims simplifies the way songwriting royalties are paid. The current system is based on an arcane rate sheet that hinges on how the music is played. For example, rates are different for radio plays and digital streaming. Apple’s proposal is simple: streaming services pay 9.1 cents for every 100 song plays.
Simple, yes, but also a shot straight at the heart of Spotify, which would have to pay substantially more in royalties than it currently does. That would almost force the Sweden-based service to raise its monthly subscription rate from $9.99, the same subscription fee charged by Apple Music, which struck its own deals with rights holders and, presumably, would continue operating under the terms of those deals.
Whether or not Apple makes a profit on Apple Music is not the point. Clearly Apple can use its enormous cash hoard and profits from iPhone sales to put some serious financial hurt on competitors. The risk for Apple is using its pricing power to eviscerate a competitor, a tactic almost guaranteed to incur the wrath of Senator Warren and other politicians of both U.S. political parties who share her views on competition and markets.
The Copyright Royalty Board will be looking at proposals from other music services as it prepares to set its rate for the four-year period beginning in 2018. Filings were due July 15, but the Board has not revealed whether any others were supplied or the contents of competing proposals.
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