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Justifying Beats, Amazon Prime Music Streaming, Swipely and Square Follow-up


Friday, May 30, 2014 (link to web view)

Good morning,

I will be traveling to San Francisco next week, which means the timing of these updates may be a little irregular for the entire week (likely several hours later on Tuesday through Wednesday in particular). Thank you for your patience.

For Access members, I plan on doing some sort of live chat during the Keynote, so if you can be online at 10am Pacific on Monday, I hope you’ll join. I’ll post details to Glassboard. In addition, I have also posted details about our meetup this coming Thursday, so check it out.

Finally, I still have a couple of slots open for consulting late Thursday afternoon; I plan on posting to the site later today unless someone here snags them first.

On to today’s updates:

Justifying Beats

One side effect of how long it took to announce the Beats deal is that it gave analysts and pundits plenty of time to come to grips with Apple’s possible rational. Philip Elmer-DeWitt has a roundup of analyst reactions, but I think M.G. Siegler summed it up best:

Honestly, I’ve been confused as to why others have been so confused by this deal. In buying Beats, Apple gets three key things:

  1. A music streaming service that can be run fully separate from iTunes, meaning it won’t entirely kill the download business (until they’re ready to merge the two down the line). And, perhaps more importantly, they get the team behind the Beats Music service rather than having to task those already working on iTunes to do something different.
  2. Jimmy Iovine, who has long supported Apple in the music business and was instrumental in helping to get iTunes off the ground in the first place (and, of course, was a friend of Steve Jobs). He’s probably the person best poised to do the vital deals with the entertainment industry going forward.
  3. The headphone business, which happens to make quite a bit of money. Sure, people complain about the quality of the headphones, but that’s something Apple can undoubtedly fix with relative ease. And I’d bet Apple’s insane supply chain management can probably make better Beats headphones while making them cheaper to produce. Win. Win. And, of course, it doesn’t hurt that they’re a fashion accessory which newly appointed SVP of Retail and Online Stores, Angela Ahrendts, she of Burberry fame, can sell.

The only real argument I see is with the $3 billion price. But $3 billion to you or me is not $3 billion to Apple. Or to any other company, for that matter. Apple makes roughly that amount in profit a month.

This is basically the argument I made after the deal was first rumored: from a strictly business perspective, this deal is eminently justifiable. To my mind the most valid and justifiable criticism is much more difficult to articulate, and has to do with culture and executive focus (which this episode of Exponent gets into).

That said, you can make another positive argument on the same grounds. Note that Beats Music is going to be operated independently from iTunes (which is clearly being disrupted by streaming services, including YouTube); according to Clay Christensen, the best way to respond to disruption is to set up a separate division that is insulated from the main company and its tendency to kill alternative business models in the crib. Perhaps accidentally, but more likely intentionally, Apple is doing just what the Doctor (of Business Administration) ordered.

Amazon Prime to Offer Music Streaming Service

Speaking of streaming services, Amazon has reportedly struck their own deal to stream some songs to Prime customers. From Buzzfeed:

Amazon, the internet’s largest retailer, is making an aggressive move into the booming and intensely competitive business of streaming music. The company will expand its Prime membership offerings by adding a stockpile of old and newish music for subscribers to stream on demand. The Prime music service, which is scheduled to launch this June or July, will not include recent releases but instead restrict its catalog to songs and albums that are 6 months old and older, five music industry sources familiar with the company’s plans confirmed to BuzzFeed.

Similar to Prime Instant Video, the on-demand video option available to Prime members, the Prime music service (the official name of which is still unknown) won’t aspire to the full universe of existing content, instead offering a potluck of select songs and albums it has licensed from labels at a discount. That distinguishes it from the prevailing business model of stand-alone streaming competitors like Spotify, Rdio, and Beats Music, all of which have tried to lure customers by promising all of the world’s music with a few precious exceptions.

Clearly a streaming service is becoming table stakes, just as a music store was before it. It will be interesting, though, to see how said services play out in the context of different firms' business models:

  • Amazon’s primary driver is still e-commerce; everything that is added to Prime does not make money directly. Rather it increases the attraction of Prime, which in turn drives a considerable increase in Amazon purchases
  • Apple is a hardware company, which is leading some to ask if Apple will make Beats streaming free for iOS devices. I’m skeptical that Apple would take the margin hit, although in a way the fact they are keeping Beats available for Android and Windows Phone perhaps makes this more likely. Then again, perhaps Apple is serious about developing a new business model - see the point I just made about fighting disruption
  • Spotify, Rdio, et al are pure play service companies - streaming is the only way they make money. In the long run, I agree with Jimmy Iovine that this business will prove to be unsustainable. I suspect both will be acquired eventually, possibly by Google or Samsung, although I think Microsoft could be interesting as well - they need more ways to monetize the consumer market over time

All that aside, I don’t really see Amazon’s service moving the needle. Undoubtedly new songs are excluded to keep costs down, which means the service will only ever be a checklist feature for Prime.

Swipely Raises $20 million

Swipely, another payments startup with a more explicit cloud and data focus, has raised a $20 million Series C. From TechCrunch:

Payments company Swipely has announced that it raised a Series C round totaling $20 million. This round, led by the Pritzker Group and including previous investors Shasta Ventures and First Round Capital, brings the company’s tally to more than $40 million.

Swipely had recently announced that its payment processing rate had doubled to $2 billion on an annual basis…the company’s revenue tracks up with its payment-processing rate, so to see it double that figure from $1 billion to $2 billion in under a year implies quick top-line growth. Competitor Square is processing around 15 times as much, or in the neighborhood of $30 billion.

I don’t have much to add; rather, I just wanted an excuse to circle back to my Square item from yesterday. Specifically, I think I might have been gotten it wrong. Several of you reached out to me on Twitter, email, and Glassboard to suggest that Square’s Cash Advance program was actually quite competitive with banks. This article says most small business pay annualized rates in the high teens at best; others noted that there is a real difficulty when it comes to banks being able to properly evaluate a small business's ability to repay, leading many to simply say no.

Square’s program addresses both of these pain points; they obviously know exactly how your business is going - every dollar is going through their servers - and the rumored annualized rate of ~10% is a lot cheaper (although I imagine different small businesses will get different rates, as you would expect). Moreover, the fact Square gets paid back through transactions made on Square purchases removes not only the burden of making a monthly payment, but also removes the option of defaulting by choice (absent getting a new payment system, of course).

I think I’ve come around, and plan to keep an eye on this. Feel free to share any more details that you may have about how this might play out.

Thanks for your support. Feel free to forward this to someone who may be interested in one of these specific topics, and encourage them to sign up here.

Have a great weekend!

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