In case you missed it, iTunes has been dipping their toes in the streaming music world lately.  Most recently it’s with a little band called Coldplay who is streaming a new track everyday on their pre-order page leading up to the release of the new album Xyloto.  In the past couple of months they have played with streaming music promotions like the full album stream of the Red Hot Chili Peppers album “I’m With You,” a week before street.

In the crazy world of music business this is significant on a few levels.  First, the access vs ownership question has a new dynamic when you enter in the worlds largest music store and community…iTunes.  I don’t believe the “go big or go home” move by Rhapsody to buy Napster is going to have any significant long-term impact.  While the acquisition puts them as the leader of “paid subscription” market with total subscribers over 1 million now, the marketplace is still highly competitive with freemium platforms like Spotify.

This raises an even more important question. Will freemium models ever convert users into paid subscribers?  If you look at how Spotify has done in this space, conversion isn’t hopeful.  Out of the Spotify 1.4 m U.S. subs, only 250,000 actually pay anything.   I just spoke to the Mobile University music business class tonight and asked them what music subscription service they use.  The unanimous answer was Spotify.  Unfortunately the follow-up question of who paid for the service was met with a unanimous answer of no one.

With the cost of goods to stream all of that “free” music on Spotify it has positioned them with huge losses each year.  In 2010 they reported a $41.5 million dollar loss, which was up quite a bit from the $26 million dollar loss in 2009.   The advertising revenue isn’t scaling quick enough, and free users aren’t converting into paid subscriptions to sustain their model despite the 2010 458% gain in revenue.

The access vs ownership / music subscription sustainable business question will be ultimately answered by the innovative company in Cupertino who in reality innovated and elevated the digital music business in the beginning.  In just 8 years of business iTunes has sold 16 billion songs (as of October 4, 2011).  They have the largest music buyer group in the world, coming in around 125 – 200 million paying customers.  iTunes has the iCloud in place.  They have watched Rhapsody, Napster, RDIO, MOG and everyone else on their platform through their app store.  They have all the market date they need to make this next move.  With the purchase of LaLa in 2009, iTunes is sitting on “go” to flip the music subscription switch when they’re ready.  Now that they have all the devices updated and sharing content across all Apple devices, it’s only a matter of time.

When this happens you will see another music market shift.  The masses will adopt subscription services through the trusted hardware, software, mobile device, tablet device, innovator Apple.  The music subscription game amongst Spotify, RDIO, Rhapsody, and others will be over.  iTunes will own this market and take it to the next level.  Labels will have to adjust to the music business model flipping yet again.  The micro-payments on streaming music revenue will not make up the shortfall in the download music purchase revenue streams.  This major market change will be reminiscent of the shortfall shift from physical music sales to digital sales.

The smart record labels will adjust now and embrace the opportunity for more exposure and consumption.  The price barrier of entry attached with purchases/ownership will be an advantage as the masses adopt subscriptions/access to all music.  The music experience will not change, but the way artists/labels market, promote, distribute, and connect with fans certainly will. I’m excited, with much change comes much opportunity.

Breathe In & Smile Out,

Chris