Can Dr. Dre Beat Spotify?

January 16, 2014 Leave a comment

Can Dr. Dre Beat Spotify?

Buying music is passe; nowadays it’s all about renting. Billboard reports that sales of “album plus track equivalent albums” fell by 7.6 percent in 2013. (Among subcategories of both digital and physical media, only vinyl sales increased last year.) The new hot trends are monthly subscription services that let people rent unlimited music from large catalogs hosted in the cloud, as well as personalized radio services that make money by selling ads.Both types of services seem to have a tough time making any money. Pandora has had negative net income for years. Spotify, the industry leader, has more than 6 million paying subscribers. But it has lost more than $200 million since 2008, according an October estimate from PrivCo, a research firm that studies non-public firms, and the size of those losses has been ballooning. This dubious track record isn’t stopping rap star and music producer Dr. Dre and Jimmy Iovine, the co-founder of Interscope Records. The duo has already created a company worth at least $1 billion by selling high-end headphones and speakers to the masses. On Jan. 21 they plan to launch a new streaming service known as Beats Music.

I can’t really tell why existing Spotify users would want to switch since, on the surface, Beats Music has basically the same set of features for the same price. (Beats boasts that its playlists are all curated by human experts and that it doesn’t “present music as a database list,” but Spotify also has human curators. It won’t be possible to compare the quality of these rival services until Beats actually launches.) These similarities could be a real challenge for Beats because many longtime users of Spotify and other subscription services will be extremely reluctant to switch platforms after having invested so much time inputting their preferences.

Beats has a secret weapon, however, that its chief executive officer announced over the weekend: a deal with AT&T to offer free trial subscriptions as well as a “family plan” for up to five users. Those who like their service will get their monthly Beats Music fee bundled into their wireless bills. According to Billboard, AT&T sees the service as a way to upsell higher-end data plans to customers who suddenly need to stream more and more content.

Combined with the celebrity endorsements and an advertising blitz — Beats Music bought a spot to run during the Super Bowl — the service may be able to use its AT&T connection to attract some new customers and build momentum for its alternative platform. That may not be enough to make any money, however. According to an analyst cited by Bloomberg News, streaming-music services need 5 to 10 million paying subscribers to break even after licensing fees.

Spotify has plenty of options available to respond to the competitive threat from Beats. Most obviously, it could partner with competing wireless carriers, such as Verizon in the U.S. and Vodafone in Europe. If it wanted to be extremely aggressive it could push to include trial subscriptions of Spotify bundled with every new data plan.

Whatever happens, all of this competition is bound to be good for consumers — except maybe for those dinosaurs (like me) who still buy CDs and vinyl.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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