Apple Takes Dead Aim at Spotify

Jul 27, 2016

Technology giant Apple Inc. (AAPL) introduced a regulatory proposal that would introduce easier rules on the payment of songwriting royalties by paying 9.1 cents for every 100 times that a song is played on streaming services. 

While the proposal is viewed as a positive force for musicians and owners of songwriting royalties, this pitch appears to target the business models of its rival Spotify, which relies on a free ad-based model to generate its audience and operates on already-slim margins. 

"An interactive stream has an inherent value regardless of the business model a service provider chooses," Apple wrote in a proposal leaked to the New York Times. 

This proposal was pitched to the Copyright Royalty Board, which is in the process of setting new royalty rates for streaming and downloads beginning in 2018.

The 9.1-cent payment structure can bee seen as a boost of payments to publishers, musicians, and other owners of music-royalty streams. But it’s clear that Apple is using its massive financial resources to introduce a system that would dramatically impact the bottom line of its rivals. 

Spotify currently has 30 million paid subscribers compared to the 13 million of Apple Music. 

This isn't the first time that Apple has taken aim at Spotify. 

Changes in Payment Structure

Recently, Apple rejected an upgrade to Spotify’s new phone application that would have introduced users to the Spotify billing system. 

Apple argued that the new app for its iOS system didn't conform with its “business model rules.” Apple argued that Spotify continue to use Apple’s billing system if “Spotify wants to use the app to acquire new customers and sell subscriptions.”

That argument appeared spurious at best. Spotify remains one of the most popular applications downloaded in the Apple Store. At its core, this came down to payment processing. 

Spotify's new application would have generated more revenue to Spotify and cut off processing payments from its customers to Apple by a significant amount. Apple elected to reject the plan in order to continue generating a revenue stream to Apple. 

That move was seen as highly uncompetitive, and it has been attracted the attention of Senator Elizabeth Warren (D-Mass.) all the way in Washington. Recently, Warren said that “Apple has long used its control of iOS to squash competition in music.” Meanwhile, Spotify has accused Apple of using its store as a way to squash competition and drive consumers to Apple Music. 

The firm's royalty proposal is its latest competitive weapon against Spotify.


Driving Subscription Costs Higher

Apple's royalty proposal takes direct aim at Spotify’s financial health. This would dramatically increase the amount of money that the company pays to artists than its current payments. 

Both Apple Music and Spotify operate a monthly subscription plan at $9.99 per user. The companies could easily end up paying much more in royalties – especially in the e case of users who regularly use the service over a full day.

Spotify is already struggling to be profits table, but higher royalty streams will make it more expensive to operate. The company will either need to increase the price of its monthly subscriptions or find ways to significantly cut costs in house.

Meanwhile, Apple Music is not the core business of Apple. The company has the potential to run Apple Music as a loss leader and to use its billions in cash and iPhone profits to hinder Spotify’s place in the market. 

It's hard to argue that Apple's decision will benefit Spotify. In many ways, it could reduce consumer choice significantly. However, in the face of declining revenues over the last two decades from the dramatic shift from physical albums to digital music, higher royalty fees are essential to improving the financial well-being of this industry. 

Royalty Exchange is attempting to get a copy of this regulatory proposals to share with our audience greater insight into what this payment structure would mean for the industry. The primary concerns right now is the impact on consumer choice and the long-term stability of streaming services. It's not clear that Apple Music would be able to sustain these price hikes as well without operating as a possible loss leader.