Consumer Products

Apple & Google Take Fight to Music Services (AAPL, GOOG, AMZN, WMG)

The iTunes store has been a huge success for Apple Inc. (NASDAQ: AAPL). Google Inc. (NASDAQ: GOOG) has yet to introduce a music marketplace, but hopes do so next month, according to the Financial Times.  At the same time, Apple is reportedly preparing to launch a new service that would allow users to store their digital music collections in the internet cloud, a feature that Google is also figured to copy.

A dark horse in the race is Spotify, which just received $100 million in venture funding that could enable it to sweep past either of the two giants.  The central issue is whether a music fan wants to own digital music files or will be satisfied to just “rent” the files.

Under the iTunes model, also used by Amazon.com (NASDAQ: AMZN) and others, music fans can buy a song for less than a dollar, download the song, and play it at will. Spotify’s approach allows fans to listen to any song in its catalog free for a limited number of hours. To have access to the music at will, Spotify charges a monthly fee. Fans don’t actually buy the songs, but the paid service will stream music to a mobile devices as well as PCs, or even let a user play music while offline.

What Apple and Google are proposing is to let users store the music they already own in the cloud from which the music would be available on different a user’s PC, laptop, tablet, or smartphone. Not a bad idea, but the Spotify model essentially takes ownership of the music out of the equation.

Music fans are used to the Apple/Google ownership model. For Spotify to succeed, it needs to provide an equal amount of music for rent and it needs to persuade music lovers that they’ll have access to all that music whenever they want it, forever.

The cloud-based services that Apple and Google are preparing are really nothing more than half measures, designed to sell music and an additional storage service that is even more useless than owning a digital copy of the music in the first place. Sales of digital music are falling, though, as fans find ways to get the music they want either by low-cost subscriptions or extra-legal means.

Google’s proposed music store is just a me-too maneuver so that the search giant can say it offers the same thing as Apple. Apple’s disk-drive-in-the-cloud is not much more than an attempt to get some value from its purchase LaLa last year. Neither Apple nor Google will make more money for themselves or for the music industry with this cloud-based strategy.

That’s no guarantee that Spotify will prevail, though. It still needs to negotiate licensing deals with Universal Music Group and Warner Music Group Inc. (NYSE: WMG), and such deals are very costly because the music companies have been bleeding revenue for years and the deal with Spotify may be their last hope to add to their top line.

If Spotify can get its deals done, sales of digital downloads could fall off even faster than they are now. Within a few years, downloads could be as scarce as LPs.

Paul Ausick