Apple strikes a new chord in future of music

May 19 2014, 11:53 IST
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With digital music downloads in decline, record labels have put pressure on Apple to get its act together on streaming, according to two of the three sources. (AP) With digital music downloads in decline, record labels have put pressure on Apple to get its act together on streaming, according to two of the three sources. (AP)
SummaryApple, the makers of iPods and iPhones, is shortly expected to announce a $3.2 bn agreement to buy Beats Electronics.

comment for this story. A spokeswoman for Universal Music Group did not respond to requests for comment.

THAWING

In buying Beats, Apple would get an up-and-coming music streaming service, a well-connected team of industry executives, and high-margin hardware. But the high price tag would represent a departure for Apple after two decades of acquisitions mainly in the hundreds of millions of dollars.

Some Wall Street analysts have termed Apple's plan purchase of Beats "puzzling." Despite the rapid growth of streaming, it remains a small slice of the overall music market. If the labels do not agree to lower royalties rates, then, like Pandora or Spotify, Apple may struggle to make its streaming profitable. And Beats is several years behind Pandora and Spotify, which have 99 million active users combined.

Still, the fact that the record labels are getting behind Apple marks a thawing in what had been at times an openly adversarial relationship, industry sources said. The "a la carte" model that iTunes introduced in 2001 had slashed revenue for the labels as it no longer required customers to buy whole albums.

Now, the music industry believes streaming is the way of the future, though its rise has not been smooth. Industry sources say licensing negotiations with the likes of Spotify and Pandora come up every 12 to 15 months and can be difficult.

It is unclear what terms an Apple-owned Beats might command. Apple does have a big bargaining chip in iTunes, which has 800 million members.

"ITunes is the number one for digital downloads," said Daniel Weisman, a manager at Roc Nation who represents bands. "If iTunes can flip the switch on their user base to become streaming subscribers, that will be a huge win for everyone."

A source at a music publisher said the labels like Beats because it was "created from within the music industry." Getting Iovine on board will give Apple huge leverage across the negotiating table as streaming develops. He will likely leave Interscope records and join Apple, according to two sources.

Apple is seldom a first mover into markets, preferring to bide its time and monitor early entrants. The company had been watching Beats Music's take-up rates since its January launch and was impressed when the service signed up some 1,000 customers a day in the initial weeks, one of the sources familiar with Apple's thinking said.

"Google, YouTube, Spotify and others are working on ways to stream music," said Andrew Mains, former

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