Apple’s Music Factory

Last week, Apple released their new music app, aptly named Apple Music.

The iTunes music store opened in 2003 and has sold more than 25 billion songs since then. iTunes changed the way that music was sold in 2003, but in 2015 it is mostly playing catch-up. The new Apple Music is similar to existing music streaming services such as Spotify, and its radio service iTunes released in 2013 is identical to Pandora.

It seems that there’s always a doomsayer who warns of a coming tech bubble return the economy to reality. These doomsayers claim that Snapchat is overvalued, Instagram is not worth a billion dollars, Twitter can’t make a profit, etc. Streaming services such as Pandora and Spotify rely solely on subscriptions and advertisements for revenue. iTunes also requires a subscription ($10 for a single license and $15 for a family license) and its radio service similarly plays ads.

Apple Music is different than these other music streaming services in one key respect: it has a way to generate profits. Apple makes money through selling phone and macs, and it seems that this new service is a marketing strategy to lure more people over from the Android and MS Windows market. The revenues Apple earns from its music subscription service are only needed to cover the costs of the streaming services, such as paying the artists and record labels. Other services, such as Pandora and Spotify, must find ways to generate profit without selling hardware, which is fairly difficult.

Apple’s move to subscription-based music is interesting to me for a couple reasons.

The first reason is that iTunes has maneuvered around its main problem to this point: charging a (relatively high) amount of money for files people can receive (steal) online for free. I feel guilty whenever I pirate music illegally, but I don’t like dishing out ten bucks for an album when I want to build my music collection. iTunes operates within the monopolist model–it charges much higher for its music than the marginal cost of distributing it, and by doing so, many people might purchase its music cannot afford to do so. Young people often wisen up to this fact and resort to stealing music online. Artists ought to be compensated for their work, and iTunes causes a significant amount of dead-weight loss right now through its sorta monopoly on digital music. Will pirating go out of fashion? Probably not, but Apple Music will probably lower the number of illegal downloads.

The second reason I find Apple Music interesting is that direction music is moving seems to be the opposite from videogames, another industry with very low marginal costs to distribute its goods. Both music and videogames have moved fully into the digital marketplace. However, the most popular videogames right now (League of Legends, DOTA 2, and Hearthstone) are all free-to-play, and make money from selling characters or cosmetic items that impatient players can buy with real-money instead of the in-game currency. Blizzard, the developer of Hearthstone, recently released “character portraits” for Hearthstone, which means that it is charging $10 for a purely cosmetic detail (players protested pretty loudly at this announcement). I am very confused why people can justify buying a character portrait for $10 but balk at the idea of buying a Kanye album for the same price. The free-to-play model seems to have taken over the videogame industry, while music is moving towards a subscription model. I wonder if this trend will continue.

Anyway, Apple Music is really cool. If you haven’t updated your iPhone to the latest OS I would recommend doing so and signing up for the free 3 month trial. If you’re looking for new music, check out Vince Staples’ new album: Summertime ’06. It’s a really good album.

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