2014: Year of the Streaming Service?

January 31 marked the Lunar New Year, ushering in the Year of the Horse. It will also be the "Year of the Streaming Service."

As I call it, the "normalization" of streaming will accelerate this year, as the continued proliferation of services drives more and more people to adopt streaming as their preferred method of consuming music. I think in many ways we're talking about a significant change in consumption patterns, and so it has taken time for people to come around to the idea. The marketplace is reaching critical mass and smartphone penetration is driving things. Consumers are increasingly aware of how they can use their phone as an entertainment device and are much more willing to change their behavior. (Spotify's recent change in allowing streaming to mobile devices as part of their free offering is a sign. To make money from their free service, Spotify must serve ads to their users, and all those eyeballs are now looking at mobile devices.)

With January's launch of the Beats Music service and the coming launch of Deezer in the US, as well as the continued evolution of Spotify, Rdio, Pandora, Slacker, iTunes Radio and Google Play, consumers will have more and more choices. Those choices will increase competition amongst all the services, forcing them to continue to innovate, tweaking their offerings to attract and retain customers. Given that customers are now more inclined to adopt a streaming service, they are likely to try several on for size and settle on one they feel satisfies their needs. In turn, those customers will get a big say in which features will become standard (as they vote with their ears and their dollars). This process, coupled with how the services manage their costs, will determine which can become dominate in the space.

All of this means that 2014 will be a pivotal year in the evolution of streaming services.

Apple announces streaming service iTunes Radio.

At this week's WWDC, Apple announced iTunes Radio, its long-awaited entry into the streaming music space. The service is similar to Pandora in that it uses information gathered about a user's personal tastes (by iTunes Genius) to construct playlists, drawing music from the entire iTunes catalog. The service will be free and ad-supported, though iTunes Match subscribers won't see the ads. iTunes Radio will launch this Fall in conjunction with the rollout of iOS 7.

Some have suggested that it is terribly late for Apple to get into the streaming music game, that it indicates they are no longer innovating. While perhaps Apple is indeed going over well-trodden ground, I don't believe that it's too late. First, with Spotify's dominance in the interactive streaming space, it would make sense for Apple to enter the non-interactive space, taking on Pandora. Second, Apple has tremendous scale, and adding a service like this only helps their overall offerings. (Note too that the iPod wasn't the first mp3 player.)

An interesting side note here is that apparently Apple has obtained the streaming rights through direct licenses and not compulsory ones. As I described in a previous post, streaming services have a variety of royalties to pay, depending on whether the service is considered "interactive" or "non-interactive". Pandora has claimed that the government-mandated rates it pays are "too high", yet Apple has entered the space paying rates that are likely even higher. This is important, as it will make it more difficult for Pandora to compete.

Something to remember here is that companies compete not just for customers but also for market share. Apple's entry into this space is the result of that.

It's interesting to hear non-industry people describe their experiences with streaming services: some insist on the choice provided by interactive services and others are happy to have an algorithm choose their playlists for them. Access models are definitely the future of music consumption, but what is unclear still is what features the public will demand from their service of choice and how that will affect the overall model. The bottom line is that it is imperative for music companies (and artists) to get into this space. Apple is doing just that.