THE BLOG

Is the Odd Antitrust Investigation Into Apple Music a Failure to Innovate?

06/12/2015 02:22 pm ET | Updated Jun 12, 2016

You've probably heard that Apple and the major labels are being "investigated" over Apple Music by the Department of Justice, the European Commission as well as State attorneys general for New York and Connecticut.

Understand that the way most of these investigations get started is that someone complained to the antitrust authorities. Who would complain loudly enough to get the attention of so many law enforcement agencies? Most likely Spotify and its board member Google in this case.

Yes, that's right. Another Valley-style example of interlocking boards of companies that are supposed to be competitors. Because that would be the same Google that owns YouTube, often described as Spotify's biggest competitor--at least before Apple Music. (Well-respected tech reporter Kara Swisher reported in Re/code that Omid Kordestani, chief business officer of Google, joined the Spotify board, and a former YouTube product head Shishir Mehrotra left Google to become a special adviser to CEO Daniel Ek and the company's management.)

So why might Spotify and Google complain to antitrust authorities? For one reason, Google and Spotify are probably stronger together than at least Spofiy is on its own. Google knows its way around the antitrust regimes quite well as it is to one degree or another under investigation by all of them. Google might find portraying itself as a victim could help their various cases, particularly before the European Commission's competition commission. Some might describe this tactic as corporate "lawfare", the use of the law to make war upon your competitors who you don't want to just meet in the channel like a normal person.

So unless these investigations are a hunting party gunning for Google competitors, I think that's a very encouraging sign for a number of reasons, none of which being the ones that Google and Spotify have in mind.

1. Investigate Everyone: Since governments are supposed to do justice, then let's investigate everyone. Spotify recently announced that "Spotify is half of the $1.5 billion global subscription streaming market" which sounds like a dominant market position that should cause antitrust regulators look twice. So by their own admission, Spotify is at least dominant in that market, so what have they been up to in doing things like using their market dominance to bully Taylor Swift?

Of course we all know how Google treats artists based on any one of a number of unnecessary debacles for YouTube, such as YouTube's bullying of Zoë Keating. Google clearly uses its market power against independent artists and record labels alike. If there's going to be an investigation of the streaming business, then let's investigate everybody.

It's a little odd that antitrust regulators are taking cues from Spotify and Google, two dominant firms in the relevant market who clearly are apprehensive about the mere fact that Apple is entering the market with what may be a better mousetrap. You would think that Google and Spotify would welcome new competitors entering the market rather than clinging to the buggy whip.

2. The Freemium Buggywhip: What's really got Google and Spotify scared may be what happens if the market tells them that the "freemium" model hasn't worked? What if the market says we don't want advertising? Because make no mistake, this is just as much about YouTube as it is about Spotify. What if the market says we're tired of our music being used for one long commercial and however much money you pay us it's just not worth it?

A free market deal that rejects the ad supported model that Google's ad networks provide to Spotify and of course to YouTube? You would think that Silicon Valley free marketeers would celebrate such innovation and competition. As the music business has been told many times, that's the problem of the buggy whip maker holding on to a past whose time has come.

3. What Taylor Swift Proved: What is driving this is a bona fide use case: Taylor Swift. Taylor proved once and for all that Spotify needs hits and hits don't need Spotify. Often over looked in the reporting on Taylor's withdrawal from Spotify is she also pretty much withdrew from YouTube except for current singles that were predominantly available on Vevo which pays more than YouTube. And none of the fans complained-they even applauded her. So how were consumers "harmed" again?

Google and Spotify would like artists to believe that artists are dependent on YouTube and Spotify for hits. If you measure hits by streams that produce negligible income and actually cannibalize sales, then you have a different view of a "hit" than anyone does who has P/L responsibility.

This is not to say that there is no music discovery value to YouTube and Spotify, but it is becoming apparent that their true value to breaking artists may be far less than the conventional wisdom and that their value to hit records is not only out of balance, it may actually be counterproductive.

When the world wakes up to this, more hit records may look like Taylor Swift-that is, not so involved with YouTube and not on Spotify at all. Did anyone ever say that record clubs made hits? YouTube and Spotify are a lot more like record clubs with an algorithm than tastemakers like NPR Music or Zane Lowe.

3. Ignoring Taylor Swift: I don't think it's a coincidence that Universal started a major restructuring of their company after the Taylor Swift use case and that the direction of that restructuring was away from free.

Since Universal were in the middle of a renegotiation of their deal with Spotify during the Taylor Swift release, it should come as no surprise that the wisdom of staying in the free model came under additional scrutiny since it was failing so badly. And failing completely independently of Apple Music.

And this is the takeaway: You would have to be very short sighted to just ignore the Taylor Swift experience and blindly cling to the "freemium" buggy whip. Free might have been a good idea a few years ago, but it hadn't delivered on its promise. It was time to move on.

4. How Much to Bribe the Richest Company in the World? Set aside how utterly daft it is to think that Apple was so afraid of a broken model at Google and Spotify that they'd have to get protection in order to even launch a music service they already paid $3 billion to acquire and clearly were going to launch unless hell freezes over. Also set aside how insulting it is that a company with Apple's integrity with artists would need to be bribed in order to compete against Google and Spotify.

How much would it take to bribe Apple? Think about that for a minute or two and the absurdity of the idea will come to you.

5. When Were the Beats Deals Concluded? Remember, Beats was a going concern well before Apple acquired the company. It's highly likely that all the deals for Beats were done before Spotify hit its self-inflicted downward spiral in the press over Taylor Swift. So it's not clear what these law enforcement agencies will be investigating.

So the key takeaways: There are good market place reasons to question whether to continue with free at all, demonstrated by Taylor Swift. On a more profound level, those reasons may support questioning the validity of Web 2.0 advertising driven business models altogether. Anything that doesn't sell advertising is anathema to Google the Spotify board member, because that might get people to question the very business model that contributes over 90% of Google's revenue. And you don't want to be a buggy whip maker who can't innovate, right?

Connecticut State Attorney General George Jepsen has already said "that his office was satisfied that Universal [Music Group] did not have anti-competitive agreements to withhold music titles from free services" according to NPR.

But if there is to be an investigation, let's investigate everyone including who fed these complaints to law enforcement resulting in a negative announcement the very day that Apple Music launched.

The timing is a little too odd.