Yes, Apple Is Back In The Disruption Business
Today’s superstar businesses are device companies, integrating hardware, software, services and connection. We don’t get much chance to stop and think what that new product model means to how you do R&D, product development and innovation. But Apple is showing us. While we were fixated on hardware, on the iPhone, the Cupertino company is disrupting radio with its new, to the smartphone, iTunes radio service.
Like it did with MP3s , Apple is not offering anything essentially innovative in product terms with iTunes Radio but the mix of all four elements above – hardware, software, service and connection – is making a difference to the sector’s business model, already. Remember Apple got 11 million unique listeners on the launch weekend, despite problems with iOS7 downloads.
And therein lies another lesson for those of us trying to figure out what a modern services business looks like. Sometimes it’s not the product or even the service that you need to influence – it’s the structure of a sector that needs to change. While most commentary focused on the impact of iTunes Radio on Pandora, there is a bigger picture and a disruption already underway.
For anyone interested in the wider transition to service-based businesses, Steve Denning was talking about the fundamentals of business strategy yesterday – I chipped in with a few comments. Radio, I think, is a good case-study for how structural change takes place.
I got talking yesterday to Patrick Reynolds, Chief Strategy Officer at Triton Digital, a company that provides services to digital radio, about this very topic. Apple and changes to the radio business.
Triton’s clients include the biggest players in radio – Clear Channel and Cumulus, for example. And the company’s role is to help them migrate to digital, with all that implies about new advertising models, audience building, technology and new revenue streams.
“iTunes Radio changes things substantially,” Patrick told me, “11 million people in just three days, that’s a good number and good pick up especially with iOS7 problems. I don’t think it’s a coincidence that a couple of days before the launch Clear Channel announced a new deal with Warner music that adjusted its digital royalty down and means it will pay a royalty for over the air.”
Here’s Billboard on that announcement:
"The alliance will allow WMG to promote its artists across Clear Channel’s 850 radio stations, online streams, and iHeartRadio programming. In exchange, WMG will share its revenue gained from all platforms."
It’s not immediately clear what the significance of that is, at least to those of us who are not steeped in radio. But “all platform” is the key phrase. Patrick explains that currently, in the US at least, radio stations do not pay a royalty on over-the-air plays. That means they get, largely, free content. The money goes into towers and promotion.
On the other hand digital stations and streaming do pay a royalty. So the advance of digital is somewhat halted by the intrusion of this different cost base.
The new Warner deal reduces Clear Channel’s digital royalty fee but introduces an over-the-air fee. In other words it levels the playing field between digital and traditional radio. And it’s only a matter of time before this one deal sets a standard for the industry. It’s immediate effect is to allow Clear Chanel to invest more aggressively in its digital service IHeartRadio. And its most likely impact is to accelerate the advance of digital.
The reason Patrick attributes change to Apple’s new radio service is easy to determine. Apple is the most significant distributor of music. According to Gizmodo:
Almost in step with Clear Channel, Cumulus, the second largest radio network in the US, announced an investment in Rdio, giving it access to digital and the mobile platform and Pandora announced a fund raising of $231 million. By the way, I was talking last week to Vince Voron, creative VP at Dolby and guess where their next generation products are headed? Smartphones, to improve the quality of listening for digital audio services.
Compared to Apple’s 11 million in one weekend, Clear Channel gets 230 million monthly listeners. Reynolds reckons it will take 30-50 million a week for Apple to be a player in this space. But that number looks well within its reach. Apple has over 500 million customers signed up to iTunes and can monetize via ads, music sales, and cross-selling in the iTunes store (which brings revenues of about $10 billion a year). It’s one more piece in the puzzle of Apple’s diversified revenue streams and an object lesson to any company migrating to services.
More importantly though, the business model in radio, long due a change, is now restructuring around digital in response. Apple is disrupting again.