Tech & Music Moguls Hold Hands, Cross Fingers

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Beats executive Jimmy Iovine, Bono, Steven Jobs and The Edge at the launch of the iPod. Hmmm...

Beats executive Jimmy Iovine, Bono, Steven Jobs and The Edge at the launch of the iPod. Hmmm…

Apple Buys Celebrity-Run Music Streaming Outfit

 

Despite the phenomenal growth of downloaded song sales during his company’s 11 years in the digital music business (see graphic, below), Apple CEO Tim Cook could see a future clouded with uncertainty: Overall digital music sales fell by 13.3 percent in 2013.

Meanwhile, cloud-based streaming services such as Spotify and Pandora were claiming 23 percent of all music-minded Americans, tripling its listeners since 2010. While iTunes still dominated the digital market with a 63 percent share, it was down from its peak of 69 percent in 2010. It really seemed as if streaming was the music industry’s next big hope.

It had been a good run for iTunes. When Apple opened its iTunes Music Store on April 28, 2003, it would change the music business forever with the cheap digital single. In 2000 Americans bought 943 million CDs, and the record company business model was churning on all cylinders. By 2007 digital units overtook CD sales; by last year, downloads dominated CD sales by a factor of 7-1.

Apple had seen this movie before. It had directed it. Now was time to make a move. The pay-per-song business model had taken on a vinyl sheen.

itunes-music-store-sales[1]

But Cook felt caution in the swirling wind. Yes, Apple could have easily created a streaming subsidiary, to sell side-by-side with its iTunes mainstay. But…but…by purchasing a brand-new streaming service such as Beats Electronics, the one that featured those cool Dr. Dre headphones,

Apple [could] coin off a smooth transition without cratering the record business. The record labels and artists depend on the approximately $1 billion iTunes earns them selling downloads each year which could be disrupted if the 800-million account store shifted to subscription streaming…By maintaining iTunes as an album/a la carte music sales service while running Beats as a sideline–the company could have it both ways.

Jimmy Iovine and Tim Cook - separated at birth?

Jimmy Iovine and Tim Cook – separated at birth?

So–as if you didn’t know–Apple bought Beats Electronics, which was less than a year old, for $3 billion and change. Apple not only got the streaming service it desperately needed to stay in the game, but the package came with Jimmy Iovine and Dr. Dre (Andre Young), music industry kingpins who will assume executive positions in Cupertino. What happens to the dress code is anybody’s guess.

Apple’s New Music Impresario

Music business stalwart Jimmy Iovine (pronounced EYE-o-veen) will begin his Apple career with a chit in his pocket from none other than Steven Jobs, Cook’s legendary predecessor. It was Iovine who “became a friend and crucial advocate for Mr. Jobs as he tried to persuade nervous record executives to sell their songs a la carte.” The rest as they say is history, and Iovine (and Dr. Dre) will be well taken care of:  A big cash payout for both plus Iovine’s record label, Interscope, which already owned a 14 percent stake in Beats, will reportedly net over $400 million in the deal.

Iovine’s work with Stevie Nicks, Gwen Stefani, U2 and Eminem “has proven his ability to understand the tastes of the mass market in an extraordinary way,” remarked David Pakman, a former digital executive. “But he hasn’t yet proven his ability to get a digital music service off the ground.”

Apple’s plunge into the subscription streaming market ably verifies the lightning-quick evolution of digital music. It has gone from CDs to downloads to streaming in just 25 years. This breathless transformation stands in stark contrast to the slow development of recorded music in human history.

Brief History Lesson: Recorded Music

Thomas Edison’stinfoil cylinder” phonograph first recorded the human voice in 1877. Edison then launched his “speaking phonograph” company commercially, only to be beaten to the punch by a one Emile Berliner, whose Victrola (playing 78 rpm vinyl discs) became the talk of the town in 1905. Columbia Records came up with 33 1/3 long-playing records in the 1940s, followed by Decca’s innovation with high fidelity sound. The 3M Company developed recording tapes that fit perfectly with Ampex’s tape recording machines. In 1963 Phillips introduced the audio cassette tape, examples of which are probably stored in the back of one of your closets.

It was Sony which revolutionized the personal recording device in 1978 with its Walkman. The company sold over 100 million of them. Meanwhile the digital revolution began in earnest around 1987, when a German company advanced a technology called MP3…short for Motion Pictures Expert Group, Audio Layer III. MP3 audio coding could “shrink down the original sound data from a CD by a factor of 12, without losing sound quality.”

Hello, iPod.

thE0POW3YG

If subscription streaming is indeed recorded music’s next frontier, artists such as Bette Midler (above) are most definitely not singing its praises. Musicians are paid royalties on songs they write and record, and the formula gets a bit complicated when a song is streamed and not sold. In the iTunes business model, here’s how the money works:

Your mom pays $.99 to iTunes for a song. iTunes takes 30 percent, so the revenue earned on this download is $.70. Of this $.70, $.091 (just about a dime) is owed to the songwriter/publisher for the digital download mechanical royalty. The rest, $.609, is the master recording royalty, owed to the owner of the recording (the artist or the artist’s label).

In the new economy of streaming music, nothing is sold: Spotify, Pandora and, yes, Beats, payfractions of a cent to record companies and publishers each time a song is played, some portion of which goes to performers and songwriters as royalties. Unlike royalties from a sale, these payments accrue every time a listener clicks on a song, year after year.

“A Torrent of Micropennies”

You can assume that Bette Midler has made her money, but what about a typical unknown musician…someone like Zoe Keating, an “avant cello” stylist (don’t ask) from Northern California. Here are the numbers: “After her songs had been played more than 1.5 million times on Pandora over six months, she earned $1,652.74. On Spotify, 131,000 plays netted just $547.71, or an average of 0.42 cent a play.”

Okay, you can make the case that a number of listeners clicked on the artist’s songs because there were no monetary consequences. But still…it affirms the record industry joke that if royalties from downloads are a “river of nickels,” streaming music “looks more like a torrent of micropennies.”

Justin Timberlake and Sean Parker - not separated at birth

Justin Timberlake and Sean Parker – not separated at birth

Streaming royalties are a genuine industry dilemma, and remedies just don’t pop up on search engines. Remember that movie about Facebook a few years ago, and the character played by Justin Timberlake who became Mark Zuckerberg’s alter-ego? That person in real life is former Facebook president Sean Parker, who is now a board member of Spotify. Like other streaming services, Spotify is a subscription service, but is also free to listeners who are willing to suffer frequent ad interruptions. Parker believes that subscription growth “will help return the industry to its former glory,” by building a “pot of money back to where it was in the late ’90s, when the industry was at its peak.”

Back before Parker founded Napster, which really began the dismantling of the music business’s money machine. It may be true that those most responsible for leveling an enterprise are the ones most capable of engineering its rebirth.

 

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Andrew Goutman

Andrew Goutman is the editor of Enter, Stage Left.

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2 Responses

  1. sassafras says:

    I remember well when single records were about a dollar apiece, when I was growing up. What’s that equivalent to now?? From what I’ve learned it’s about $8.00! Was it that much more lucrative to be a musician back in the day? I don’t know -even today if I want music I tend to go out and get the CD. Must be very frustrating to be a singer/songwriter today, loved by millions and making very little from the listeners. (Is there any correlation here to ebooks, I wonder?). It will be interesting to see if people are willing to subscribe to a service that interrupts music with ads. I think I will be staying with CDs for now.

  2. In the tight space that is my music world, I am loyal to iTunes because I can’t imagine not owning the songs that I love. But I also read the daily paper that’s delivered to my doorstep every morning. I suppose I need tangible proof of my choices. I’ve never considered any other way.

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