Apple Mulls Launching Spotify Rival, Android App as Downloads Decline (Sources)

The iPhone maker explores multi-pronged strategy to shore up double-digit drops in iTunes downloads, according to IFPI and RIAA data

Apple has opened exploratory talks with senior label executives about the possibility of launching an on-demand streaming service that would rival Spotify and Beats Music, according to three people familiar with the talks. Apple is also thinking about adding an iTunes App for Android phones, the Google rival that has been growing faster than the iPhone, these sources said. The surprising discussions are part of a multi-pronged strategy to deal with the double-digit decline in U.S. download sales at Apple’s iTunes Music Store, the largest music retailer.

Apple is considering a range of efforts to support the iTunes Store. iTunes executives like Eddy Cue and Robert Kondrk, for example, have suggested creating exclusive album-release windows in which digital versions of the albums would go on sale ahead of the CD release. Individual tracks would not be available for sale until the CD versions hit shelves.

But it's the talks around on-demand subscription and the iTunes App for Android that will most intrigue label heads and the wider market. Apple founder Steve Jobs was widely known to have argued that fans would never subscribe for music. Moreover, up until now, iTunes has been committed to keeping the iTunes ecosystem closed off.

But now, nearly three years after Job's death, iTunes has to consider the option because so far this year, U.S. digital album sales are down 13 percent for the week ending March 16, and digital track sales are down 11 percent for that same period, according to Nielsen SoundScan.

Even as download sales have deteriorated, revenue from streaming services have grown, according to two reports released on March 18. The first, from the Recording Industry Association of America (RIAA), showed that streaming services such as Spotify, Pandora and YouTube generated $1.4 billion in subscription, advertising and licensing revenues in the U.S. last year, up 39 percent from 2012, while downloads revenue were down 3.2 percent to $2.9 billion. The second report, from the International Federation of the Phonographic Industry (IFPI), painted a similar picture, albeit on a global scale. Streaming music revenue grew 51 percent worldwide, while downloads slipped 2.1 percent.

These figures provide fresh ammunition to those in the music industry who believe streaming services’ all-you-can-listen model has drawn consumers away from download sales, where Apple dominates. But industry executives also believe that the growth of Android is also impacting iTunes sales. While the Google Play App store offers iTunes apps, they are all from third-party developers. Meanwhile, the iTunes App stores has official Google apps for Google Play Music, Google Books, and Google Play Movies & TV.

With iTunes accounting for more than 40% of U.S. recorded music revenue any decision it makes about its business model will have a significant impact on the labels' business models.

"They are feeling out some people at labels on thoughts about transitioning its customers from iTunes proper to a streaming service," says one major label source. "So when you buy a song for $1.29, and you put it in your library, iTunes might send an e-mail pointing out that for a total of, say, $8 a month you can access that song plus all the music in the iTunes store. It's all in the 'what if' stage."

An iTunes spokesman declined to comment on the discussions, which are still at a very early stage, according to sources.

Apple already has a streaming service with iTunes Radio, which launched last September. But the free ad-supported service, similar to Pandora, has limited control over the songs they can hear.

According to several reports. Apple is looking at the possibility of spinning out the service from the iTunes suite as a standalone app. While initially excited by the iTunes Radio, label executives say the service needs more work. Indeed, it appears that the launch of the Apple service "had a measurable (albeit relatively small) impact on Pandora, after a short period of time that impact appeared to decline," according to court documents from the Pandora/ASCAP rate court hearing. "Pandora has continued to grow despite the presence of iTunes Radio."

Meanwhile, iTunes began an initiative to make its store easier to shop and is trying to promote catalog titles more, in hopes of stimulating download sales.

Last November, sources say iTunes executives reached out to the major labels and asked each of them to clean up the catalogs of their top 100 selling artists. They don't want multiple versions of the album showing up; nor do they want to have a dozen greatest hits/best of albums for each artist.

"This is an incredibly complex task, just to figure out what we needed to do," said one executive involved in the process. "When you start going into smaller countries and trying to get it fixed, you can find 14 versions of a single in, say, Belgium, and many of the versions might be the wrong one for that market."

If a legacy artist, for example, has a dozen greatest hits albums in the iTunes store, some because different versions of albums have been issued in different markets, iTunes expects the major to have maybe two greatest hits albums for each market, one at regular price and one at deluxe pricing, and then perhaps allow for one more theme compilation.

In return, iTunes is paying attention to public domain and gray product offerings to make sure such sales don't detract from the legitimate copyright owners in each market. This is an issue near and dear to the heart of the majors because often, something that might be public domain in Europe could wind-up appearing in the U.S. stores where the copyright is still in effect, and thus could cannibalize sales from the legitimate copyright holder.

Additional reporting ­ Alex Pham