Apple reportedly plays dirty to kill Spotify's free tier -- and I hope it gets away with it

By David Holmes , written on May 4, 2015

From The News Desk

Over at the Verge, there's a report out that Apple is pushing music labels to "force" Spotify to abandon its free, ad-supported tier. As Apple prepares to gather the ashes of Beats Music and relaunch its own streaming music service -- which sources say will likely be paid-only -- this gambit would decimate Spotify's user base from 60 million total users to only 15 million paid users. Moreover, sources told the outlet that if Universal Music Group removed its catalog from YouTube, Apple would pay the licensing fee the label conglomerate receives from that platform. (YouTube also has a streaming service in the offing). Considering Apple's ability to preload apps onto new versions of iOS -- not to the mention the fact that it already has 800 million credit cards on file and so only needs to convince a tiny portion of them to sign up in order to beat Spotify -- the move would be an effective knockout punch for Apple in America's streaming music fight.

These tricks are dirty, unfair, and possibly illegal -- especially in Europe where regulators are far tougher on big tech firms accused of antitrust violations.

But you know what? Part of me sincerely hopes Apple gets away with it. Here's why.

First off, as countless anti-Spotify artists have pointed out, there's nothing remotely "fair" about labels' current arrangement with Spotify. When a listener who pays $9.99 a month for the service listens to a song, rightsholders receive ten times the royalty payment that is paid out when a listener on the free tier hears a song. The amount of revenue generated by these paid listeners is staggeringly higher -- both per-user and in aggregate -- than the amount generated by freeloaders. In 2013, fee subscriptions like Spotify's paid tier generated $628 million for the record industry while free ad-supported listening tiers generated only $220 million (the remaining $590 million is made up of online radio royalties, primarily from Pandora). That disparity is even greater when taking into account the fact that based on generous estimates there are fewer than 30 million people worldwide who pay for Spotify, Rdio, and other streaming platforms, while there are up to 400 million monthly active users listening for free, if you include people who use YouTube to listen to music. In other words, less than ten percent of the listening public creates almost half the total revenue generated by streaming music across the board. And while Spotify's ad units have become more inventive and may become more lucrative as the company scales, it's clear that the only business model that makes sense both for artists and for the streaming services themselves -- none of which have achieved longterm profitability -- is one supported by paid listeners, not advertisements.

There's an argument to be made, however, that most users simply won't pay for music anymore, and that if options like Spotify's free tier are taken away consumers will merely return to piracy. That may be true. Indeed, as Spotify's user base has grown the percentage of users willing to pay $9.99 a month for full mobile access and to avoid ads has held steady at only 25 percent. But that doesn't necessarily mean most users won't pay for music -- it simply means most users are unwilling to pay $120 a year for music -- which was true even in the cash-soaked days of CDs, when consumers paid an average of $28 a year. Meanwhile, Apple found that the average iTunes user was willing to spend $48 a year on music, or $4 a month. And so with Apple's entry into the streaming music game, we could see a repeat of the early 2000s when iTunes came in to help stop the bleeding caused by piracy -- or in this case, free streaming which while somewhat more lucrative than piracy is perhaps almost as unfair -- while undercutting the competition and effectively taking over as the dominant music distributor. And while labels were initially reluctant to accept Steve Jobs' terms when he proposed iTunes, the reason for these industry incumbents' misgivings was that iTunes would forever sever songs from albums -- just as the Internet unbundled newspapers -- thus ensuring a consumer would never again pay ten dollars or more to access just one song. Today, however, that unbundling is already the new normal in the music industry so labels have much less to lose.

Of course this could be a PR nightmare for Apple -- "Tim Cook took away free music!" And there's always the possibility for unforeseen consequences when one large company controls the distribution channels within an entire industry, hence the reason for antitrust legislation.

But the current system is broken. Spotify has built a huge user base by providing a complimentary service that it cannot afford to offer for free. Despite striking proprietary deals in secret with labels -- deals that many artists say gives them little shot at making a fair wage -- the company still isn't profitable. It doesn't work for Spotify or artists. The only constituent it does work for -- other than perhaps labels who take huge percentages of the streaming revenue -- is fans. But for how long? Unless users start paying -- which is precisely what Apple's gambit forces -- there is no foreseeable "sustainability" in the streaming industry. And while the EU and DOJ should scrutinize Apple over these moves, the fact that by making a number of potential antitrust violations Apple would be making streaming music more fair, simply speaks to how completely unjust the status quo is.

[illustration by Brad Jonas]