Two years ago, Apple (AAPL) reportedly tried to get the music industry to cut its royalty rates to the point where it could offer its pending Apple Music streaming service for just $5 per month. While that effort didn't pan out, the company might now be on the verge of securing a favorable compromise.
Should such a compromise be obtained, it would say a lot about how the music industry now sees subscription services as a growth opportunity rather than just a distribution alternative, and pricing accordingly.
Citing "a pair of sources working closely with [Apple Music]," trade site Digital Music News reports Apple is in talks to cut the price of its music streaming service by up to 20%, something that would bring its cost to $7.99 per month for an individual subscription, down from $9.99. Family plan pricing could also be cut by $2, to $12.99 per month. The price cuts could reportedly arrive before Christmas.
Web radio leader Pandora (P) , which is set to launch an Apple Music rival and has been dealing with flatlining active listener growth, is down 2.5% in the wake of the report. Pandora sold off last week in response to soft results and guidance.
Amazon's (AMZN) recent launch of a streaming service that costs just $8 per month for Prime subscribers is said to apparently be "the biggest motivation" behind the price cut talks. Amazon charges non-Prime users $10 per month, and also offers a version of its service that only works with its Echo home assistants for $4 per month. The company's older Amazon Music service provides Prime subs with free access to a relatively limited song library.
In addition to Amazon, Alphabet's Google (GOOGL) has exacted some price pressure, albeit indirectly. The company's YouTube Red music service costs $10 per month, but also provides ad-free YouTube and a growing stable of original video content. Like Apple, market leader Spotify still charges $10 per month for its standard service, $15 per month for a family plan and $5 per month for student plans.
While licensing details have been kept under wraps, it's quite unlikely the announced or rumored discounts would be possible if music labels weren't willing to shake up their pricing. A look at recent industry sales trends helps explain why.
After years of seeing flat or negative growth, global music revenue rose 3.2% in 2015 to $15 billion, according to trade group IFPI. This was fueled by a 45.2% increase in revenue from streaming services (both paid and free) to $2.9 billion. That, along with a 4.4% increase in performance rights revenue, more than offset a 10.5% drop in paid download revenue and a 4.5% drop in sales from physical music formats.
And the momentum appears to have grown in 2016. Trade group RIAA estimates U.S. retail music revenue respectively rose 8.1% annually in the first half of the year to $3.4 billion, the best growth seen since the late 1990s. Streaming revenue is believed to have risen 57% to $1.6 billion (47% of total revenue), with paid subscriptions more than doubling to 18.3 million.
Spotify and Apple are clearly responsible for much of the streaming growth. Spotify topped 40 million paid subscribers in September, just six months after topping 30 million. Apple Music claimed 17 million subscribers as of September, less than 15 months after launching. At current pricing, 17 million paid subs would produce over $2 billion in annual revenue.
It's finally dawning on the music industry that streaming subscriptions aren't just a substitute for paid downloads and album sales, but a way to meaningfully grow the pie. These services are getting millions of consumers who were previously generating little annual revenue for the industry, to producing quite a bit of it.
At a retail price of $8 per month ($96 per year), the annual revenue provided to music labels, artists and other industry parties would still be substantial -- likely over $60 per year, judging by Spotify's licensing costs. That's certainly more than many Spotify or Apple Music subs could be expected to give the industry via downloads and album purchases, if streaming services didn't exist.
Thus, just as movie and TV studios got streaming religion and began licensing much of their content at rates that allowed Netflix (NFLX) and its peers to flourish, the Big Three music labels -- Vivendi's (VIVHY) Universal Music, Warner Music and Sony's (SNE) Sony Music -- now might be willing to offer licensing terms that could spur further growth for a burgeoning subscription music market.
That's a positive for the likes of Apple and Spotify, and perhaps even moreso for their customers. Pandora, on the other hand, can't be thrilled.