Why Apple Inc. (AAPL) Needs Music Streaming: Microsoft Corporation (MSFT), Google Inc (GOOG)

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Although digital download sales have become the saving grace of the music industry, we’re already seeing a shift in digital music services from downloads to subscription streaming. Last fall, rumors spread that Apple Inc. (NASDAQ:AAPL) was working on a subscription service of its own, but have since faded with the onslaught of iWatch and iTV speculation. While investors and fanboys wait with bated breath for the next big innovation, an Apple music streaming service is a great opportunity, if not a necessity, for the extension of the iTunes brand.

Apple Inc. (NASDAQ:AAPL)Going mainstream(ing)

In 2012, streaming service subscriptions accounted for over 10% of total digital music revenues, according to the IFPI. That number is significantly higher in Europe, at about 20%, and particularly high in Sweden (where Spotify originated) and France (home of Deezer).

Whereas download sales improved 12% worldwide last year, subscriber numbers improved 44%. And while digital music still only accounts for about one-third of total music sales, there’s no doubt that digital subscription services disrupt the digital download market.

Looking at the countries with significantly higher subscription adoption, one sees an inverse proportion of internet users downloading songs. France and Sweden, two of the three countries with the most music subscription users per capita, were in the bottom three of countries profiled for digital downloads by Ipsos MediaCT. As subscription services continue to grow in popularity, digital download stores such as iTunes will see diminished sales growth.

Big names moving in

Other big names in tech have already moved into the digital streaming territory. Microsoft Corporation (NASDAQ:MSFT) has long experimented with a subscription music model ever since it released its Zune mp3 player. More recently, the company launched the Xbox Music Pass in an effort to leverage its Xbox brand as the home entertainment hub.

Microsoft Corporation (NASDAQ:MSFT)’s strength in selling subscription services is evident in its 46 million Xbox Live subscribers (out of 76 million total consoles sold), generating over $1 billion in revenue per year. Xbox Music Pass extends the Xbox user base, compelling the large audience to buy new Windows based devices – PCs, tablets, phones – in order to take full advantage of the service.

Microsoft Corporation (NASDAQ:MSFT) also has the advantage of being ubiquitous on every new Windows 8 device, encouraging new computer purchasers to give it a try. As Windows 8 replaces older versions of the software, subscription rates ought to climb as trials turn into subscriptions. In essence, Xbox Music Pass is Microsoft’s attempt at developing an ecosystem like Apple’s iTunes that leads to sales of more Windows and Xbox devices in the future.

Google Inc (NASDAQ:GOOG) technically already has a foot in music streaming with YouTube. VEVO is the most viewed channel on YouTube, streaming 4 billion music videos per month. What’s more, YouTube has even become a tool for music discovery. Think about it; what would Gangnam Style be without YouTube?

Now, Google Inc (NASDAQ:GOOG) is reportedly talking with big labels in an effort to launch its own streaming service. With Google’s huge presence in the smartphone market, this could be particularly distressing to Apple’s biggest source of revenue. Android phones start to look even more competitive when they come with free unlimited music streaming. Of course, Google wouldn’t cut out non-Android devices, but the service may not integrate as nicely, especially considering Apple’s recent bout with Google-centric apps.

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