Can Dr. Dre Beat Spotify?

(Originally published here.)

Buying music is passe; nowadays it’s all about renting. Billboard reports that sales of “album plus track equivalent albums” fell by 7.6 percent in 2013. (Among subcategories of both digital and physical media, only vinyl sales increased last year.) The new hot trends are monthly subscription services that let people rent unlimited music from large catalogs hosted in the cloud, as well as personalized radio services that make money by selling ads.

Both types of services seem to have a tough time making any money. Pandora has had negative net income for years. Spotify, the industry leader, has more than 6 millionpaying subscribers. But it has lost more than $200 million since 2008, according an October estimate from PrivCo, a research firm that studies non-public firms, and the size of those losses has been ballooning. This dubious track record isn’t stoppingrap star and music producer Dr. Dre and Jimmy Iovine, the co-founder of Interscope Records. The duo has already created a company worth at least $1 billion by selling high-end headphones and speakers to the masses. On Jan. 21 they plan to launch a new streaming service known asBeats Music.

I can’t really tell why existing Spotify users would want to switch since, on the surface, Beats Music has basically the same set of features for the same price. (Beats boasts that its playlists are all curated by human experts and that it doesn’t “present music as a database list,” but Spotify also hashuman curators. It won’t be possible to compare the quality of these rival services until Beats actually launches.) These similarities could be a real challenge for Beats because many longtime users of Spotify and other subscription services will be extremely reluctant to switch platforms after having invested so much time inputting their preferences.

Beats has a secret weapon, however, that its chief executive officer announced over the weekend: a deal with AT&T to offer free trial subscriptions as well as a “family plan” for up to five users. Those who like their service will get their monthly Beats Music fee bundled into their wireless bills. According to Billboard, AT&T sees the service as a way to upsell higher-end data plans to customers who suddenly need to stream more and more content.

Combined with the celebrity endorsements and an advertising blitz — Beats Music bought a spot to run during the Super Bowl — the service may be able to use its AT&T connection to attract some new customers and build momentum for its alternative platform. That may not be enough to make any money, however. According to an analyst cited by Bloomberg News, streaming-music services need 5 to 10 million paying subscribers to break even after licensing fees.

Spotify has plenty of options available to respond to the competitive threat from Beats. Most obviously, it could partner with competing wireless carriers, such as Verizon in the U.S. and Vodafone in Europe. If it wanted to be extremely aggressive it could push to include trial subscriptions of Spotify bundled with every new data plan.

Whatever happens, all of this competition is bound to be good for consumers — except maybe for those dinosaurs (like me) who still buy CDs and vinyl.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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