Apple Inc.'s announcement last week that it would start enforcing a 30% tariff on subscription services running on its iPhones and iPads sent waves of sturm und drang through the digital entertainment landscape.
It seemed to be particularly bad news for music streaming services such as Rhapsody, eMusic, MOG and Rdio, which already pay more than half of their revenues to music publishers and record labels for the rights to stream millions of songs on demand. Slicing an additional 30% for Apple would leave these services with little left over to run their businesses, according to Rhapsody Chief Executive Jon Irwin.
Drew Larner, the chief executive of San Francisco-based Rdio, recently gave The Times a more sanguine point of view.
"Apple is obviously a very powerful and successful company, but it’s not the only platform out there," Larner said. "There will always be multiple ways to access music."
Apple's curveball is only the latest challenge to hit the music subscription business, which has struggled for years to get traction with consumers. Music analysts have estimated that the total number of subscribers in the U.S. who pay monthly fees between $5 and $10 has been stagnating at around 2 million, even though such services have been around since 2001, when Rhapsody launched.
Even so, Larner, a former executive vice president of Spyglass Entertainment and before that vice president at 20th Century Fox, said there are several reasons to think subscription music services will eventually thrive. Here are five:
1. The lightbulb moment. Most people aren't aware music subscriptions exist. Even giant retailer Best Buy, which purchased Napster, has had some difficulties marketing the service. Larner believes that once people catch on that they can get access to virtually any song they want on demand for less than the price of a CD per month, they'll pull the trigger.
"Subscription music services will still take some time for people understand why it is the future," Larner said. "Once we reach the tipping point, though, I think it will move quickly."
2. Idiot-proofing. Until recently, many services came with a number of head-scratching limitations. Some services worked only with certain devices. Others were saddled with lengthy copyright restrictions meant to curb unauthorized copying.
Now, there are fewer restrictions and device compatibility is much less of an issue. "The labels have become much less restrictive and more forward thinking with their digital strategies," Larner said.
3. Smart phones. They comprised 31% of the U.S. cellphone market in the fourth quarter last year, according to Nielsen, and are projected to hit 50% this year. Able to reliably stream music from a wireless connection and cache thousands of songs in their generally prodigious memory, smart phones have become portable mini-computers for a large chunk of the population. As a result, music subscription services are able to run far more seamlessly between a computer account and a mobile account, Larner said.
4. The What-to-Listen-to-Next problem. Earlier services played only what listeners directed them to play. But most people didn't want to constantly mess with the settings and had a hard time figuring out what to play next once they've run through their own top 40 list. Next generation services, such as Slacker and Pandora, solved that problem by asking the listener what they like to listen to, and then playing a constant stream of music that's similar.
The latest generation of music subscription services, such as Rdio, try to take things one step further by incorporating what their subscribers' friends are listening to. "It's Twitter meets Facebook meets music," Larner said.
5. Better software designs. It's not just about making the services easy and simple, Larner said. It's also about designing digital music services that let people can manage the thousands of albums they like to listen to while also discovering new music. This, as with points one through four, is a work in progress.
Will Apple's subscription plan slow down the work further? Most think that it will.
"The mobile platform as a whole is providing a growth opportunity for the industry as a whole," said David Krinsky, chairman of the subscription services working group of the National Assn. of Recording Merchandisers and head of label relations at Rhapsody. "To threaten that is extremely concerning."
Krinsky and Larner agree that most music subscription services would be forced to pull out of the iPhone and iPad if Apple follows through with its 30% levy in June.
Larner, for one, is looking ahead to see what's next on Rdio's playlist beyond Apple. "We’ve seen great uptake on Android," Google's mobile operating system, which made up 27% of the smart phone market in December, according to Nielsen. Rdio, founded by Skype creators Janus Friis with Niklas Zennström, also works on Microsoft's Windows 7 operating system, BlackBerrys and, as of Thursday, Roku players.
"It’s an opportunity for us to push the gas on distribution on other available platforms," Larner said.
-- Alex Pham
Photo: Rdio Chief Executive Drew Larner. Credit: Zachary Larner / WithExtraVinyl.