In a move that initially baffled many industry analysts, Apple (NASDAQ:AAPL) announced in May that it was acquiring Beats Electronics for $3 billion. While Beats Electronics is primarily known as a maker of premium headphones, the deal also included Beats Music, a subscription streaming music service that made its debut in early 2014. Although the price of the acquisition was relatively low considering Apple’s $150 billion-plus cash pile, many analysts struggled to see the rationale behind the deal, especially since the iPhone maker already has a well-established brand of music services under its iTunes banner.
However, new music consumption data from Nielsen appears to offer more proof that Apple’s acquisition of Beats Music was a prescient move to stay ahead of the curve in the music industry, rather than a shortsighted “cool” brand purchase. According to the Nielsen Entertainment & Billboard’s 2014 Mid-Year Music Industry Report provided by TechCrunch, sales of digital albums declined by 11.6 percent in the first six months of 2014 compared to the same time period last year. Digital track sales saw a similar 13 percent decline during the first half of 2014 as well.
Meanwhile, the on-demand audio streaming market that includes services like Beats Music saw a year-over-year increase of 50.1 percent. “With On-Demand streams surpassing 70 billion songs in the first six months of 2014, streaming continues to be an increasingly significant portion of the music industry,” noted Nielsen Entertainment SVP David Bakula.
Apple has long dominated the digital music download market with its iTunes store. However, the music download business has been in decline over the past several quarters as more consumers move toward the subscription-based music streaming model. Although it’s not known exactly how much the decline in the overall digital music download market has affected Apple, Morgan Stanley analyst Katy Huberty estimated in May that iTunes sales have seen a year-over-year decline of 24 percent, reports 9to5Mac.
While Apple already offers an ad-supported music streaming service with iTunes Radio, the service does not allow users to select tracks on demand like Beats Music does. The free streaming service has also failed to revitalize Apple’s declining iTunes download business. According to unnamed label executives cited by Billboard, only 1 to 2 percent of iTunes Radio listeners opt to buy music through the service. However, Beats Music provides Apple with a readymade subscription music-streaming service that will give the Cupertino-based company a running start in this rapidly growing segment of the music industry.
Comments made by Apple senior vice president of Internet software and services Eddy Cue at Re/Code’s Code Conference soon after the Beats acquisition was announced appear to support the idea that the iPhone maker was looking to bolster its music business with Beats Music. “[M]usic is dying. It hasn’t been growing,” said Cue, according to 9to5Mac. “When you bring what Beats has got and what we’ve got it’s not two plus two is four. It’s something much more than that.”
Only time will tell if Beats Music will prove to be the savior of Apple’s overall music business. However, the latest Nielsen data seems to suggest that Apple was wise to make as quick of an entry as possible into the burgeoning subscription music-streaming services market.
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