The Daily Item, Sunbury, PA

January 11, 2014

Beats music unveils subscription streaming to challenge Spotify

By Andy Fixmer and Cliff Edwards
Bloomberg News

NEW YORK — Beats Music, whose founders turned headphones into a must-have accessory, unveiled a subscription music-streaming service that will attempt to make the money-losing category as hip and profitable as its gear.

Founders Jimmy Iovine and Dr. Dre will offer a $9.99-a-month product combining hand-curated tunes with technology that chooses music based on users’ tastes and moods. To challenge industry leader Spotify, Beats Music forged partnerships with AT&T and Target, and signed Ellen Degeneres to promote the service on her show, said CEO Ian Rogers.

“It’s a business model that requires scale,” Rogers said in an interview. “You need millions of subs for the business to work. By definition, there will only be a few players.”

The challenge will be to gain enough subscribers to turn a profit. Spotify, with more than 24 million worldwide users, has converted just 6 million into paying subscribers — far below the 38 million of Netflix, the online video service, for example. Beats Music is also competing with online options that include Pandora Media radio and Apple’s ITunes Radio.

Music-streaming services need 5 million to 10 million paying customers to profit after paying licensing fees to rights holders, according to Roger Entner, an analyst with Recon Analytics in Boston.

Unlike others, Beats Music has no plans to offer a free, ad-supported option, Rogers said. Instead, the company plans to achieve scale through deals with wireless carrier AT&T and Target, the Minneapolis-based retailer.

AT&T will offer a 30-day trial of individual Beats Music subscriptions, as well as an exclusive family plan for $14.99 that starts with 90 days free, covering as many as five users and 10 devices. Once the trial ends, the cost is included in customers’ wireless bill, David Christopher, AT&T Mobility’s chief marketing officer, said in an interview.

“We can change the game with subscription music services marketed through carriers,” Christopher said.

Target will provide 30-day free trials to customers who buy some electronics and entertainment items the week of Jan. 26, said Erin Conroy, a spokeswoman.

Beats Music applications will become available in the U.S. on Jan. 21 online and for mobile devices running Apple’s iOS, Google’s Android and Microsoft software, according to the Santa Monica, Calif.-based company. The service begins Jan. 24 on AT&T, Christopher said.

While the number of paying streaming-music customers stood at 29 million last year, the market is projected to reach 191 million worldwide by the 2019, according to ABI Research. The cost of rights, overhead and technology mean services need large numbers of users to be viable.

“No one’s cracked the nut in terms of how to make money,” said Rich Karpinski, a senior analyst with Yankee Group. “Subscription music makes a ton of sense, but it’s a big land change for consumers in terms of understanding advantages to paying for it.”

Spotify, the Stockholm-based streaming leader, has lost $200 million since its founding in 2006, according to an October estimate from PrivCo, a researcher that follows closely held companies.

As with Spotify, Beats Music will allow subscribers to search and play music, as well as create and share playlists. Users can save unlimited tracks on mobile devices and computers, accessible as long as the subscription is current.

Iovine, the record producer and music executive, and Dr. Dre, the rap star born Andre Young, marshaled their celebrity friends to position headphones from Beats Electronics as something more than run-of-the-mill audio gear.

With bass-thumping sound technology and a prominent circular design, the company attracted young consumers willing to pay $299 for the latest in hip, gaining a 65 percent share of the headphone market, according to researcher IDC. Dre and Iovine expanded into computers made by Hewlett-Packard, automotive sound systems and smartphones created by HTC, which took a stake in Beats Electronics that it later sold back to the company.

To parlay their brand position into streaming, Iovine and Dr. Dre plan a major marketing campaign to highlight how the service differs from others. Beats Music will run an ad in the Super Bowl, the New York Post reported. A 30-second spot during the Feb. 2 telecast on Fox costs an average of $4 million, according to Kantar Media.

“Beats is not only a billion-dollar headphone company but a brand that means premium audio,” Rogers said. “It’s not about delivering more tracks. We want to start to answer the question of, what should I listen to?”

The partnership with Dallas-based AT&T may lead to additional partnerships in which artists sponsor mobile streaming of their latest tracks, eliminating concerns over exceeding monthly data plans, Yankee Group’s Karpinski said.

“You can be really creative in how you present music and create a way in which both sides, the carrier and the service, can attract and retain customers,” Karpinski said.