Apple and Beats Developing Streaming Music Service to Rival Spotify

Almost a year after agreeing to pay $3 billion for Beats, the maker of hip headphones and a streaming music service, Apple is working with Beats engineers and executives to introduce its own subscription streaming service. The company is also planning an enhanced iTunes Radio that may be tailored to listeners in regional markets, and, if Apple gets what it wants, more splashy new albums that will be on iTunes before they are available anywhere else, according to people briefed on the company's plans.

In a sign of how important Beats is in reshaping Apple's digital music, the company has made a musician a point man for overhauling the iPhone's music app to include the streaming music service, as opposed to an engineer. Trent Reznor, the Nine Inch Nails frontman who was the chief creative officer for Beats, is playing a major role in redesigning the music app, according to two Apple employees familiar with the product, who spoke on the condition they not be named because the plans are private.

Perhaps most telling for Apple is what its new streaming service will not have: a lower price than rival services.

According to several music executives, who spoke on the condition of anonymity because the talks are private, Apple recently tried but failed to persuade record labels to agree to lower licensing costs that would have let Apple sell subscriptions to its streaming service for $8 a month - a discount from the $10 that has become standard for services like Spotify, Rhapsody and Rdio.

That $2 markdown may be small, but Apple's failure to secure it reflects a shift in the company's relationship with the music industry. While Apple once enjoyed enormous negotiating power as the dominant force in digital music - an area it helped pioneer more than a decade ago with music downloads - it now faces an array of new competitors and finds itself in the position of needing to modernize its offerings to catch up to the streaming revolution.

That has weakened Apple's leverage - and the labels could not be happier about it.

Toni Sacconaghi, a financial analyst for Sanford C. Bernstein, said that Apple's apparent struggle over lowering the pricing of its music service now was a result of being late to the streaming game.

"They're used to being a shaper rather than a responder," Sacconaghi said. "This is one of the few times where Apple is playing catch-up and not necessarily coming from a position of strength."

Tom Neumayr, an Apple spokesman, declined to comment or make executives including Reznor available for interviews.

Apple's turn toward streaming is a matter of necessity, as listeners increasingly shift from music downloads to streaming. According to the Recording Industry Association of America, downloads generated $2.6 billion in revenue in 2014, down 8.5 percent from the year before. Streaming made $1.87 billion last year, and overtook CD sales for the first time.

As the biggest retailer of music, Apple remains a crucial marketing partner for the music industry. Yet its absence from streaming has let others get a head start. Spotify, which started in Sweden in 2008 and came to the United States in 2011, said in January that it has 15 million paying subscribers around the world, as well as 45 million more who listen free, with advertising. (Apple's iTunes has more than 800 million customer accounts.)

Exactly how Apple will match Spotify is unclear. Music executives say they have not been shown a prototype of the new streaming service, nor been told much detail about it.

The new music app, which is a collaborative effort between Reznor and other Apple and Beats employees, including Jimmy Iovine - who founded Beats with the hip-hop star Dr. Dre - will feature the streaming music service with many of the same characteristics as the Beats Music streaming service, one Apple employee said. Those may include curated playlists and a more vivid visual appeal, while conforming to Apple's sleek and minimal design aesthetic, one person said. The name Beats Music will most likely be shed.

According to an Apple employee, the service is being tested as part of a new version of the company's mobile software system, iOS, which has been given the code name "Copper" and is expected for public release this year.

Iovine has set the tone of the transformation of Apple's music plans, according to music executives. Iovine, who reports to Eddy Cue, Apple's head of software and Internet services, has been leading aggressive talks to secure prominent album releases that will be exclusive to Apple, akin to what Beyoncé did when she released her self-titled album on iTunes in December 2013. One music executive involved in the negotiations described this part of the new iTunes as "Spotify with Jimmy juice."

A crucial difference for Apple's streaming service is that unlike Spotify, it will have no free tier. That has greatly pleased top executives at major music labels, who have begun to complain openly that so much free music has given consumers too little reason to pay for it.

Apple is also expected to overhaul iTunes Radio, the free service that the company introduced in September 2013 as a competitor to Pandora, and which has had little impact on the marketplace. One new player is Zane Lowe, a former BBC radio DJ known as a trend-spotter. Last month he announced that he would join Apple in Los Angeles, where the Beats team is concentrated.

Lowe is expected to play a role reconfiguring iTunes Radio. Among the ideas that have been floated for iTunes Radio are a more geographically targeted approach that would bear some resemblance to a traditional radio station, with Lowe as the voice, music executives said.

Whether or not Beats is a success, it would make just a small dent to Apple's overall business. Sacconaghi of Sanford C. Bernstein noted that if Apple's streaming music service were to make as much money as, say, Pandora, which generates roughly $1 billion in revenue a year, that amount would be less than one half of 1 percent of Apple's annual $183 billion in revenue.

Ben Bajarin, a consumer technology analyst for Creative Strategies, said that the hope for online entertainment services like Beats is to add more hooks for people to keep buying Apple products. But a music service is just one potential lure among many others in Apple's offerings, like apps, movies and the iPhone's operating system.

"In the grand scheme of things, this isn't trying to be the next big business," Bajarin said about Beats Music. "It's just trying to be an evolution in their ecosystem that has many moving parts, not just one."

© 2015 New York Times News Service