Q&A: Apple Music & Ad-Supported Internet Radio

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Adotas Q&A with Pat Higbie, CEO, XAPPmedia

Q: What does the entrance of Apple Music in the market mean for Internet radio companies like Spotify and Pandora?

A: XAPPmedia expects Apple Music to expose new listeners to streaming music services. A little over 50 percent of U.S. consumers are already using Internet radio and Apple Music has the clout to accelerate adoption by the remainder. I believe most existing Internet radio users have already chosen their favorite music streaming service and very few will abandon their current favorite for Apple Music. I do think that Beats One Radio has the potential to have a significant impact on broadcast radio listening because broadcast listeners might prefer this DJ-curated experience with dramatically lower ad loads.

Q: Do you believe that Apple Music is a threat to Internet radio? Why?

A: No, to the contrary, we see Apple Music as a growth engine for the industry
. Apple has clout with its loyal iPhone users and will become a catalyst for more consumers to try Internet radio. The initial trial period may actually result in new consumers also trying out other streaming services such as Spotify and Pandora. It will lift listenership across the industry.

Apple Music is probably a bigger threat to broadcast radio. The company already tried with iTunes radio to make inroads into Internet radio with mixed results. In its re-launch as Apple Music, the company is taking direct aim at existing broadcast radio listeners. Beats One is attempting to replicate the broadcast radio experience and will almost certainly steal listening time as users shift their listening habits.

What are Internet radio companies doing to increase their revenue and stay competitive?

A: Internet radio services are embracing three key strategies today to increase revenue. The first is implementing ad-supported “freemium” models. This approach drives revenue from new listeners through advertising and serves as an onramp to converting subscribers. The second is adopting ad formats with substantially higher CPM rates such as interactive audio ads and video ads. The third is local advertising, which also increases CPM rates. These three advertising strategies help drive higher revenue without increasing ad loads that can undermine listener experience.

Q: Why do record labels seem to embrace Apple Music more than other Internet radio providers?

A: Record label executives see Apple as a secure avenue for driving revenue, but not necessarily for increasing audience size. Apple reinforced this perception by emphasizing Apple Music’s subscription model in the announcement while downplaying the fact that on its own free on-ramp – Beats One radio. By contrast, music label executives are suspicious that other streaming services are more interested in their users than in maximizing royalty payments. iTunes is the dominant seller of music downloads, which is a revenue stream the labels would like to perpetuate and they want a streaming service that is not focused on displacing it. Additionally, Apple Music is going to be paying a higher royalty rate – 71.5 percent of revenue versus the industry standard of approximately 70 percent.

Q: What are your predictions for the next 12 months in the Internet radio industry?


A: I predict that within the next twelve months there will be more consumer choice
, more advertisers, more premium ad products, more ad-supported users and more subscription users in a ratio of 9-to-1 as supported through research by Strategy Analytics.

Q: How will competitors rethink their advertising and revenue models given the release of Apple Music?

A: Google Music Play has already provided an answer to this question for streaming services. Google’s former subscription-only service just introduced an ad-supported “freemium” listening tier. Apple is primarily going to increase competition for the top 10-12 percent of consumers that will pay $120 dollars a year for streaming. The competition for the 88-90 percent of consumers that will choose ad-supported listening is the next battleground. Any service hoping to be a big player must have a strategy for the ad-supported listening masses.

It should also be a wake-up call for radio broadcasters. They will need to start investing in their online strategies as their audience increasingly migrates to mobile devices.

About Pat Higbie:

Pat is an entrepreneur with a career of building technology firms from the ground up. He is building a culture at XAPP that fosters ownership, commitment and innovation from every team member and partner. Prior to XAPP, he was EVP at Xtone; and before that was Founder and CEO of DataFocus. DataFocus was a pioneer in data modeling and relational data base design and later developed NuTCRACKER. He sold the services business to CIBER, and the NuTCRACKER business to MKS (now PTC).

Pat received a BS in Civil Engineering with High Honors from the U. S. Coast Guard Academy and an MS in Civil Engineering from the University of Illinois where he was inducted into the Phi Kappa Phi Honor Society. He is a registered Professional Engineer in the Commonwealth of Virginia.
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