Apple, Google sound the death knell for operator music services

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Jason

If it seems like there are already too many streaming music services to count, just wait until Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) enter the mix. Neither mobile giant has officially confirmed plans to launch a streaming service, but both seem like foregone conclusions to challenge established players like Spotify, Pandora and Rhapsody.

Rumors of Apple's streaming music ambitions first emerged last fall, when The Wall Street Journal and The New York Times reported the computing giant is mulling a multi-platform effort that would program content based on users' favorite artists, songs and genres, most likely taking the form of a preinstalled application integrated into Apple devices like the iPhone and iPad. Soon after, Bloomberg reported Apple was deep in talks with record label partners ahead of a proposed first-quarter 2013 launch: Insiders stated the labels demanded an upfront licensing fee as well as a percentage of ad revenues and tools for integrating commercials spotlighting their recording artists. Sources also said Apple views the streaming initiative as a way to grow its iAd mobile advertising platform and is looking to integrate the service with its iTunes digital music storefront to fuel download sales.

The plot thickened this week after Reuters reported Apple CEO Tim Cook and Senior Vice President of Internet Software and Services Eddy Cue met last month with Beats Electronics CEO and co-founder Jimmy Iovine to explore a potential partnership involving the audio technology firm's forthcoming Daisy streaming service. Insiders stated that Cook expressed interest in details of Daisy's business model and its rollout plans; Cook and Iovine, who also serves as chairman of record label Interscope-Geffen-A&M, additionally discussed a broad range of music-related subjects, but the two executives did not address specifics of a deal. (With or without Apple's participation, Daisy is shaping up as another major player in the streaming space: This week, Beats--best known for its signature headphones--announced it has secured $60 million in funding for Daisy from investors including Warner Music owner Len Blavatnik.)

Google's interest in entering the streaming music biz only recently came to light, but rumors suggest the company has not one but two services in the pipeline. Late last month, publications including The Wall Street Journal and Bloomberg revealed Google is currently in talks with major record labels to license their catalogs for a premium service optimized for mobile devices and slated to go live as soon as the third quarter of 2013. While the initiative is designed to boost the consumer appeal of Google's Android mobile operating system, giving Android device owners expanded access to entertainment on the go, a source said services are expected to roll out to non-Android smartphones and tablets as well.

Now Fortune is reporting that Google's YouTube unit plans to launch a multi-platform streaming music service of its own, offering both free, ad-supported access as well as a subscription-based, ad-free option; Google currently monetizes YouTube by selling ads against music videos, awarding a cut of revenues to its label partners. It's unclear exactly how the two Google services would co-exist and Google isn't talking. However, a YouTube spokesperson did say "While we don't comment on rumor or speculation, there are some content creators that think they would benefit from a subscription revenue stream in addition to ads, so we're looking at that."

Apple and Google's inevitable arrival will expand the streaming music ranks in the short term, but in the long term, their presence seems destined to drive some services out of business. Apple and Google have the kind of scale and resources few companies can match: They can not only integrate digital music services directly into the devices they manufacture and/or power, but their influence means they can strike more favorable deals with the recording industry than smaller players. Music labels need Apple and Google to survive: Asymco analyst Horace Dediu calculates iTunes contributed 60 percent of the $5.6 billion the recording industry earned from digital music downloads in 2012, while a recent Nielsen "Music 360" report from 2012 states that 64 percent of teenagers prefer YouTube over any other music listening and discovery engine. Whatever Apple and Google demand, labels are likely to give them.

But it's not only dedicated streaming music startups that should fear Apple and Google's muscle: The fat lady will sing for operator-backed music services like Verizon Wireless' (NYSE:VZ) V Cast Music with Rhapsody and Sprint Nextel's (NYSE:S) RealNetworks-powered Sprint Music Plus, too. These services aren't dead yet--Leap Wireless' (NASDAQ:LEAP) Cricket Communications subsidiary's Muve Music now boasts more than 1.1 million subscribers, and last month, the carrier said it will begin licensing the platform to other mobile operators across the globe--but once Apple and Google enter the picture, operators are in big trouble. This week Juniper Research reported that carrier storefronts and portals now yield just 6 percent of mobile content downloads worldwide, far behind Apple's App Store and Google Play at a combined 70 percent. Once Apple and Google roll out streaming music services, subscribers will inevitably gravitate to them--their brands are synonymous with mobile entertainment, and consumers tune out everyone else.--Jason

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