Image via WikipediaAs I've written many times before, I'm a big fan of Bob Lefsetz' Letter, but I disagree with his assessment and critique of iCloud. He claims that by striking a deal with Apple, labels and publisher have sold their soul by essentially killing subscription services. He ponders why any consumer would spend even $3/month on a subscription service ($36/year) when s/he could sync all purchased and stolen music with a cloud service for $25/year. Yet, as I read the details of Apple's offering, I thought it was a really shrewd step for Apple, the record labels and music publishers.Why?
1. Monetizing pirated music: If millions of people start syncing their collections with iTunes Match, the labels and publishing companies will start receiving royalties on all music, not just purchased music, which represents a small percentage. I understand that at $25/month for iTunes Match, the royalties won't be substantial, but it will be a start...something. It might also benefit a wide range of artists whose music is widely bootlegged through P2P networks, but don't receive any revenue. This could benefit both major label and indy artists.
2. Getting consumers accustomed to streaming their music collections: Many users listen to songs via streaming radio services like Pandora, but that's quite different from listening to your own collection on demand. Any song, album or playlist...anytime anywhere. Currently, only consumers who subscribe to a music subscription service are accustomed to this service, and they represent a very small percentage of the total music-listening audience.
3. Introducing music-related subscription services without marketing it as "music rental": A common objection to subscription services is that consumers don't like the notion of not owning the music. If they stop subscribing to a service, they lose access. With this initial offering, iTunes in the Cloud and iTunes Match sit somewhere between subscription and ownership: consumers might still "own" the music, even if that music is pirated, but they are paying for its always accessible storage and multi-touchpoint access. For wary consumers, it might feel less scary when it's initially positioned as storage and service rental, NOT music rental.
4. Increasing prices with incremental storage and new music options: My understanding is that iTunes Match allows for 20,000 songs. That's pretty incredible, but it is still limited to music you have in your iTunes folder. It doesn't allow you to listen to new music, for which Apple could begin to charge incrementally. Imagine if 6 months after iTunes Match launches, Apple offers iTunes Cloud Plus for $50/year and iTunes Cloud Mobile for $15-20/month, which deliver streaming and/or downloaded/cached new music on demand, respectively, a la Rdio, MOG, Spotify and Rhapsody. At this point, many consumers will be invested in, and accustomed to, the iCloud service, so that the additional charges won't seem so extreme. These incremental options will start nudging a shift towards music subscription adoption without consumers thinking of it as "renting music." If this doesn't happen within 6 month, it could roll out within a year, bringing a lot of money into Apple and the music business' coffers. [Ultimately, Apple may even be able to step into Netflix's territory by offering a video subscription option as well. I'm willing to bet this is part of Apple's ultimate strategy].
Here's what I've been unable to discern from Apple's website. After the consumer has signed up for iTunes in the Cloud and synced his iTunes music, is music only streamed to various iOS devices, or is it pushed/downloaded to the devices? My sense is that it's the former (i.e., streamed), which might be frustrating and expensive as mobile operators end their all-you-can-eat bandwidth plans. It will also be impractical for those who travel in locations that don't have good connectivity, like subways and planes. This will then allow Apple to offer a more expensive "download" option so that more music resides locally on iOS devices, triggering larger "mechanical" royalties for publishers as opposed to performance royalties.
The net net of this is that contrary to Lefsetz' opinion, I think at long last, the music labels and publishers have made a long term bet, taking something of a financial hit in the short term for greater long term games. Without question, it's a gamble. I believe it will be a smart one.
Remember it was not all that long ago that our cable and cell phone bills were 1/3rd of what they are today. It was through an incremental, tiered offering strategy that prices edged upwards, and now, none of us could imagine life without these services. I think the same trajectory is possible with music and with iTunes in the Cloud.
Apple might just have saved the music business if it can hang on long enough.
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