A new battleground?
Competing with iTunes in the digital-download space is hard to do. While companies such as Amazon and Google have failed to break Apple’s grasp by attacking Apple in digital download and matching services, another opportunity in the next transformation of digital music could provide a new way to compete: streaming.
Streaming services are becoming increasingly popular. Most users might be familiar with Pandora and Spotify in the space because of their popularity in the United States, but the space is extremely competitive. A study by website PaidContent mid-last year found 73 digital music services in the United Kingdom alone.
Why is there so much competition? Well, user interest is shifting in this direction, and money has been quick to follow. A study by IFPI found that while download music sale units increased 12% last year, paying for subscription music services increased 44%.
Apple is assuredly tuned into this opportunity. The newest version of iOS has hidden radio buttons that appear to be part of Apple’s efforts to build a new Pandora-like service within iTunes. Yet it does seem behind in the space. While it tries working on the right approach to creating a Pandora-like experience, news recently broke that Google itself is working on a Spotify-like service that could launch this year.
Streaming music is the ultimate platform play
The interesting part of the streaming-music gold rush is that the economics of the industry are terrible. In fiscal 2009, Pandora had sales of $19.3 million and a loss of $32 million. Sales have since soared to $383 million across the past 12 months, but losses have remained at … $32 million.
The problem is that advertising revenue barely covers the content costs that streaming companies have to pay labels. Throw in necessary increases to pay more employees as companies grow and the infrastructure costs for streaming all that music, and costs scale almost directly with increasing sales.
In spite of efforts from the industry to move to more subscription services and decrease its music licensing and royalty fees, it’s a lousy business as it currently stands. Yet what these services lack in profitability, they make up for in influence. A recent Goldman Sachs Group, Inc. (NYSE:GS) study found 62% of iOS users ranked Pandora a top-three music service they listen to on their phones, versus 59% who ranked their iTunes library as a top-three service.
With Apple having gained so much over the past decade-plus of iTunes dominance, having third-party applications begin to take up more importance in users’ minds is clearly a threat to the company.
Enter Samsung?
So how could an Apple rival profit from these changing trends in music? I’d put forth that Samsung has the most to gain. Android fueled Samsung to 215.8 million smartphone shipments last year. The next-closest rival in the Android space was Huawei, which captured just 4.9% of the smartphone market in the fourth quarter. Samsung collected 29% of all smartphone sales.
Samsung’s dominance has been stunning, but there are a couple of troubling long-term threats to the company:
1. It’s hard to control a market with such dominance when you’re relying on a platform like Android that’s open for hundreds of handset vendors to use. So far, the company has used superior marketing spend and better product design to keep its lead. However, Samsung’s wariness over using Android is shown by its development of its own mobile operating system, Bada, and its recent leadership in another OS, Tizen.
2. Google’s fear that Android will become dominated by Samsung has recently been splashed across the news. The company is rightfully nervous that Samsung controls such much of the platform. This is especially troubling for Samsung, since Google owns its own hardware unit in Motorola that it could use to push out designs and wean Android off its Samsung reliance.
