360° Coverage : Why Apple And UMG Could Sink Amazon's Prime Music

Why Apple And UMG Could Sink Amazon's Prime Music

Jun 13 2014, 10:56am CDT | by

Apple's Most Notable Acquisitions

By Zack O’Malley Greenburg and Ryan Mac

Amazon.com introduced its long-awaited streaming service, Prime Music, on Thursday to much fanfare. As it entered a crowded space ready to do battle with the likes of Spotify and Google, industry observers were quick to note that, with more than 20 million subscribers already in place, Jeff Bezos’ new audio toy immediately became one of the largest paid music services in the world.

But Amazon’s offering may already be destined to fail, thanks to the actions—both recent and historical—of a major competitor: Apple.

That’s because Prime Music is essentially an incomplete product, launched without the participation of Universal Music Group, one of the world’s three major recorded music companies alongside Sony and Warner Music Group. The absence of Universal, which easily boats the largest market share of music among the three, means that Amazon won’t offer tracks from the likes of Lady Gaga, Kanye West and many others.

There are a handful of factors that could be holding UMG back from working with Amazon, and according to a number of industry insiders, one of them could be its connection to Beats By Dr. Dre and subsequently, Apple. Through its Interscope label, UMG became an early equity holder in Beats—which, like Interscope, counts Jimmy Iovine as a founder. Apple confirmed last month that it would be acquiring Beats, which was cultivating its own music streaming service, for $3 billion.

“Interscope is Beats Records,” 50 Cent told Forbes earlier this year. “There’s no artist that has a marketing budget supporting what they’re actually doing that doesn’t have Beats headphones in the actual visual to support that brand, that company.”

UMG holds a stake in Beats that sources place at 20%, which will translate into a pre-tax payout of about $520 million when Apple forks over $2.6 billion for the headphone maker later this summer, with the remaining $400 million coming at a later point. The connection leaves UMG with a much closer link to Apple than to Amazon.

“I’ve always known in my heart that Beats belonged with Apple,” Iovine said in a statement, when Apple announced its acquisition.

A spokesperson for Amazon and an employee at Beats did not respond to requests for comment.

Of course, there are other possible explanations for UMG’s reticence—some observers point to the fact that Amazon reportedly offered the same initial payment (anywhere from $25 million to $50 million) to all three major labels. Given its much larger size, UMG may have balked at the split.

Other sources say that UMG is asking for mucg higher royalties for streaming, in part, because Amazon cannot offer up equity in a possible deal. In the past, the label was able to use its size to negotiate for significant minority stakes in companies like Spotify and Beats. Bezos’ company may be less willing to hand over shares, which in turn could have led to UMG demanding higher royalties for streaming content.

There’s also the specter of the deals of yore, with UMG perhaps feeling burned by past arrangements with—who else—Apple.

“Many labels still remember the sting of the deals made for iTunes when Apple presented the labels with ‘take it or leave it’ propositions that cut the labels’ license margins significantly and set bad precedents for other digital transmission deals,” says entertainment attorney Lori Landew of Fox Rothschild. “And many labels still regret not taking a harder line before succumbing to the pressure of the Apple forces.”

How this scenario plays out may determine whether or not Amazon can place a horse in the streaming music race with enough power to compete with the likes of publicly-traded Pandora, Clear Channel-backed iHeartRadio and a combined Apple and Beats. Without UMG’s catalogue, that seems unlikely, particularly with upstarts like Songza—rumored to be on the verge of being acquired by Google—rising quickly to enter the fray.

Amazon, however, remains defiant. Already engaged in public pricing battles with book publisher Hachette and video distributor Warner Home Video, the Seattle company has made its intentions clear by moving Prime Music forward without UMG’s content. It’s a decision that reinforces the company’s desire to establish the same type of dominance it has in online retail and to become a content subscription service that encompasses movies, television shows, books and now, music.

The final category may prove the most difficult battleground for Amazon, and a victor in this particular contest for music streaming appears to far from emerging./>/>

“This really is analogous to the early days of the home video in the late 1970s when there were the competing VHS and Betamax formats,” says veteran music lawyer Bernie Resnick. “It took several years before the public forced the issue by voting with their wallets.”

Expect the same from streaming.

For more on the business of music, follow Zack O’Malley Greenburg and Ryan Mac on Twitter.

 
 

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