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Apple and the Streaming Future
Posted by: Muhammad Bazil (IP Logged)
Date: September 27, 2012 11:19AM

To say that Apple (AAPL) was the first company to promote streaming software would not only be a bold lie, but the opposite of the truth. Apple has been a staunch defender of local media, from iTunes, iPod, and early Apple TV. Even in the days of iPod the company deliberately omitted the inclusion of an FM Radio Tuner. Apple has been reluctant to pounce on anything that isn’t related to local media.

Recently all Apple TVs received an update from the company regarding live streaming of the iTunes music festival. The feature was nothing to consider monumental. For some time Apple TV has been able to play NBA, MLB and NHL games live when purchased. The new detail was that Apple itself was the streaming entity and not an outside party.

According to a recent report from the Wall Street Journal, the company plans to launch its own streaming music service to rival services like Pandora (P) and Spotify. The news will come as a surprise to many considering the company when launching its iCloud service. Many noticed music streaming was not part of the platform.

Still, Apple prides itself on making money, not losing it, and streaming services tend to do more of the latter. Take for example Pandora’s poor results last quarter; the company basically said they didn’t plan to make any money. The feeling was mutual at rival Spotify whose CEO mentioned "profitability is absolutely not a priority" when discussing the earnings. So why would Apple get itself into a model that makes almost no money?

One could at least ponder the notion that the company could promote its hardware sales and essentially become the de facto streaming service by mandating it among hardware lines, which makes simple enough sense. Also Spotify has increasingly become a threat the to Apple ecosystem omitting certain features that Apple is opting to promote, like Airplay from the desktop version.

The much bigger omission is of course the partnership that Spotify maintains with Facebook (FB) CEO Mark Zuckerburg, and Sean Parker, Spotify investor and Facebook founder. With Facebook unofficially in the streaming music business the company has a rather large foothold in Apple’s dominant digital music business. Others could also point to Facebook and Apple’s troubled negotiations over Facebook and Ping integration, Apple’s social music service that has yet to succeed. Many could argue that it would be Apple simply acting to protect its primary business line.

But this makes no sense to me. This is the company that charges $10 to change the MagSafe adapter to work on newer notebooks. I still can’t figure out what the new feature is. The company is even planning on changing the iPhone connector and selling an adapter to retro-fit older docks, which are already in a ton of cars and radios. Don’t get me wrong, the iPhone needs a new adapter, but this company doesn’t go into business to lose any money, so why streaming?

Looking at Warner Music Group’s earnings report I can confirm two things are happening: one, streaming now is 25 percent of their revenue. Two, surprisingly digital sales are up. That means that more people are purchasing music in addition to streaming music, and likely from the music leader.

Apple has enough weight in the music industry to make something like this successful for the whole industry. For example, online radio dictates that popular songs not receive an excessive number of plays like a popular radio station would. The result is the station begins to play older music in an attempt to avoid overplaying popular music. Also, not every artist participates in Spotify, for anyone that’s tried listening to Adele. Apple could forge a grand bargain that could finally rival FM radio’s dominance on replaying hit songs, while also promoting its digital music business.

The making of some service like this has been long in the making and might have been evident when Apple launched its Genius software built into iTunes, which learns all iTunes users' likes and music tastes. With years of archived data the company could provide a superior alternative in the streaming market both in its catalog and user data. Tying in the company’s failed iAd platform would also reintroduce the platform and give Google (GOOG) a little PPC anxiety.

Still, like many things, the tea leaves will only start giving more clues as time goes on. The New York Times is already reporting that the announcement is unlikely to coincide with Wednesday’s expected iPhone 5 release. So for now we will simply have to wait.

Stocks Discussed: AAPL, GOOG, P, FB,
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