Apple Inc. (NASDAQ:AAPL) Faces the Music

Apple Inc. (NASDAQ:AAPL) Faces the Music

Apple’s abrupt about-face on paying royalties for songs during a three-month free-trial period for its new music service was a symbolic victory for superstar Taylor Swift and other artists, and a shrewd business move by Apple, at a time when the streaming phenomenon is causing major changes in the music industry.

The olive branch extended by Apple comes as music is increasingly being consumed on streaming services like Spotify and Deezer to the detriment of album sales and iTunes downloads heightening tensions between artists, labels and service providers over who gets paid and how much.

Apple had already agreed to share revenue from the new Apple Music service once users start paying a 10-a-month subscription fee for the service, which it plans to launch June 30. But the technology giant wasn’t planning to pay artists and labels directly for the use of their music during the free, 90-day trial period that it’s offering to get fans to try the service.

That changed quickly Sunday, after Swift posted an open letter to Apple opposing the lack of royalties during the free period, and declaring she’d be withholding her latest album “1989” from Apple Music because of it. Apple Senior Vice-President Eddy Cue reversed the company’s trial-period terms, which had gone out to thousands of independent labels, including Swift’s Big Machine Label Group, after the technology giant reached a deal with major label groups Universal, Sony and Warner in early June.

The company needed to avoid a “PR nightmare” and quickly extinguish the firestorm that Swift had created, said Daniel Ives, tech stocks analyst with FBR Capital Markets.

“They needed to handle this perfectly,” Ives said, because Apple is facing an uphill battle against competing services like Spotify that are already well-established. “There can be no snafus or speed bumps, from the artists’ perspective, or any type of consumer backlash.”

Apple hasn’t publicly revealed how much it will pay in royalties for the free streaming period. Cue declined to offer financial details in an interview with The Associated Press on Sunday, but he said the payments will be based on a different formula than the company had already negotiated for sharing subscription revenue, since Apple won’t be collecting any revenue from the 90 days of free streaming. Instead, Cue said, royalties for the free streaming will be based on a standard amount for each time a song is streamed.

Jeff Price, the CEO and founder of royalty collection firm Audiam, said the free-period royalties could amount to about 25 million per month in the U.S. alone if Apple Music pays the same as Spotify did in December 2014, according to publishers’ data. Ives noted the cost to Apple is “not even a rounding error” for a company that made 39.5 billion in profit and 182.8 billion in revenue for its last fiscal year.

While Apple Music doesn’t have any subscribers yet, compared to the 4.7 million Spotify had in the U.S. then, its global launch in 100 countries could quickly change that. Still, Price says the gesture will likely be worth it for Apple.

“It got them an unlimited amount of public goodwill and artist goodwill,” Price said.

Some artists did praise Apple Monday for its decision, while many more cheered Swift for taking her public stand. Rocker Elvis Costello called Swift “our future president” on Twitter and added, “You tell ’em, Girl.”

Artist grumbling about the lack of compensation during Apple Music’s lengthy free trial had been brewing since the unveiling of service at Apple’s developer conference two weeks ago.

The American Association of Independent Music expected a flood of sign-ups at launch, suggesting to its members in an email they should reconsider releasing music to the platform right away: “We are struggling to understand why rights holders would authorize their content on the service before October 1.”

The fact that independent labels drove this change highlights their growing power in the music industry and Apple’s practice of simply offering independent labels terms that had been negotiated with the majors, said Rob Enderle, principal analyst of the Enderle Group.

“It certainly showcases to Apple that if they step on the labels, some of them can step back pretty hard,” Enderle said.

Withholding their latest releases from services like Spotify had already become the norm among top artists who see more to gain from download sales in the initial release period, including Swift and Adele, who herself is set to release “25” sometime later this year. But few artists have the same clout, and because download sales are falling in favor of revenue from streaming services, few spoke out publicly either for or against the plan.

Cue wouldn’t comment on whether Swift will now make her album “1989” available on Apple Music.

Ben Bajarin, a longtime Apple watcher and founder of research firm Creative Strategies, said he’d never seen Apple make such a quick reversal on a major business issue. But he said Apple had no reason not to change position after it was clear artists were upset. And it will likely even gain more favor among fans.

“If there were people on the fence about trying the new service, there are tens of millions that will probably try it now, just to see what it’s about, and that will help Apple achieve its goal faster,” Bajarin said.

Apple Inc. (Apple), incorporated on January 3, 1977, designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. In addition, the Company offers its own software products, including iOS, the Company’s mobile operating system; OS X, the Company’s Mac operating system; and server and application software. The Company’s primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software.

iPhone

iPhone combines a mobile phone, an iPod and an Internet communications device in a single handheld product. Based on the Company’s Multi-Touch user interface, iPhone features desktop-class email, Web browsing, searching and maps and is compatible with both Mac and Windows-based computers. iPhone automatically syncs content from users’ iTunes libraries, as well as contacts, bookmarks and email accounts. iPhone allows customers to access the iTunes Store to download audio and video files, as well as a variety of other digital content and applications. The Company launched iPhone 5, its latest version of iPhone. In addition to the Company’s own iPhone accessories, third-party iPhone compatible accessories are available through the Company’s online and retail stores and from third parties.

iPad

iPad is a multi-purpose mobile device for browsing the Web, reading and sending email, viewing photos, watching videos, listening to music, playing games, reading e-books and more. iPad is based on the Company’s Multi-Touch technology and allows customers to connect with their applications and content in a more interactive way. iPad allows customers to access the iTunes Store to download audio and video files, as well as a variety of other digital content and applications. In addition to the Company’s own iPad accessories, third-party iPad compatible accessories are available through the Company’s online and retail stores and from third parties.

Mac

The Company offers a range of personal computing products, including desktop and portable computers, related devices and peripherals and third-party hardware products. The Company’s Mac desktop and portable systems feature Intel microprocessors, the OS X operating system and the iLife suite of software for creation and management of digital photography, music, movies, DVDs and Websites. The Company’s desktop computers include iMac, Mac Pro and Mac mini. The Company’s portable computers include MacBook Pro and MacBook Air.

iPod

The Company’s iPod line of portable digital music and media players includes iPod touch, iPod nano, iPod shuffle and iPod classic. All iPods work with iTunes. In addition to the Company’s own iPod accessories, third-party iPod-compatible accessories are available through the Company’s online and retail stores and from third parties. The iPod touch, based on iOS, is a flash-memory-based iPod with a widescreen Retina display, a Multi-Touch user interface and built-in iSight camera. iPod touch allows customers to access the iTunes Store to download audio and video content, as well as a variety of digital applications. The iPod nano is a flash-memory-based iPod that features the Company’s Multi-Touch interface allowing customers to navigate their music collection by tapping or swiping the display and built-in Bluetooth for wireless listening. The iPod shuffle is a flash-memory- based iPod that features a clickable control pad to control music playback and VoiceOver technology enabling customers to hear song titles, artists and playlist names. The iPod classic is a hard-drive based portable digital music and video player.

iTunes

iTunes is an application that supports the purchase, download, organization and playback of digital audio and video files and is available for both Mac and Windows-based computers. iTunes features integration with iCloud, AirPlay wireless music playback, Genius Mixes, Home Sharing and syncing functionality with iOS devices. iTunes is integrated with the iTunes Store, a service that allows customers to discover, purchase, rent and download digital content and applications. The iTunes Store includes the App Store and iBookstore.

Mac App Store

The Mac App Store allows customers to discover, download and install Mac applications. The Mac App Store offers applications in education, games, graphics and design, lifestyle, productivity, utilities and other categories. The Company’s OS X operating system software and its iLife, iWork and other application software titles are also available on the Mac App Store.

iCloud

iCloud is the Company’s cloud service, which stores music, photos, applications, contacts, calendars and documents and wirelessly pushes them to multiple iOS devices, Mac and Windows-based computers. iCloud’s features include iTunes in the Cloud, Photo Stream, Documents in the Cloud, Contacts, Calendar, Mail, automatic downloads and purchase history for applications and iBooks and iCloud Backup. Users can sign up for free access to iCloud using a device running qualifying versions of iOS or OS X. Software Products and Operating System Software The Company offers a range of software products for consumers and for SMB, education, enterprise and government customers, including the Company’s iOS and OS X operating system software; server software; professional application software; and consumer, education and business oriented application software. iOS is the Company’s mobile operating system that serves as the foundation for iOS devices. iOS supports iCloud and includes features, such as Notification Center, a way to view and manage notifications in one place; iMessage, a messaging service that allows users to send text messages, photos and videos between iOS devices and Maps, with turn-by-turn navigation. iOS supports Siri, a voice activated intelligent assistant, which is available on qualifying iOS devices. OS X, the Company’s Mac operating system, is built on an open-source UNIX-based foundation. Application Software iLife is the Company’s consumer-oriented digital lifestyle application suite included with all Mac computers. iLife features iPhoto, iMovie, iDigital Versatile Disc (DVD), GarageBand and iWeb. iPhoto is the Company’s consumer-oriented digital photo application and iMovie is the Company’s consumer-oriented digital video editing software application. iDVD is the Company’s consumer-oriented software application that enables customers to turn iMovie files, QuickTime files and digital pictures into interactive DVDs. GarageBand is the Company’s consumer-oriented music creation application that allows customers to play, record and create music. iWeb allows customers to create online photo albums, blogs and podcasts and to customize websites using editing tools. iWork is the Company’s integrated productivity suite designed to help users create, present and publish documents, presentations and spreadsheets. iWork includes Pages for word processing and page layout, Keynote for presentations and Numbers for spreadsheets. The Company also has a Multi-Touch version of each iWork application designed specifically for use on iOS devices.

Other Application Software

The Company also sells various other application software including Final Cut Pro, Logic Studio, Logic Pro and its FileMaker Pro database software. The Company manufactures the Apple LED Cinema Display and Thunderbolt Display. The Company also sells a range of Apple-branded and third-party Mac-compatible and iOS-compatible peripheral products, including printers, storage devices, computer memory, digital video and still cameras and various other computing products and supplies. Apple TV allows customers to watch movies and television shows on their high definition television. Content from iTunes, Netflix, YouTube and Flickr, as well as music, photos, videos and podcasts from a Mac or Windows-based computer can also be wirelessly streamed to a television through Apple TV.

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