Apple

“Siri — Will HomePod Be A Huge Hit?”

It’s hard to find a person who doesn’t like music.

A 2014 Nielsen study reported that 93 percent of U.S. consumers listen to music, and 75 percent of them make a conscious decision to do so. I’ll bet that’s pretty much the case for everyone, everywhere in the world.

I think that it’s also hard to find someone who can’t associate music with some of the most important moments in their lives.

Brides- and grooms-to-be choose carefully the song that will commemorate their first dance as husband and wife. This summer’s wedding-goers will hear a lot of Ed Sheeran’s, “Thinking Out Loud.” Doctors crank up the tunes in the OR to reduce anxiety and keep surgical team members focused, and athletes listen to music to get psyched before games (QB TB12’s favorite is 4 Non Blondes, “What’s Up”).

Holidays have songs (who doesn’t love Nat King Cole’s, “The Christmas Song”?) and seasons do, too. While it’s too early to declare the summer of 2017’s blockbuster, last year’s Summer Anthem was Drake’s, “One Dance.”

Parents even play Beethoven’s “Fifth Symphony” to their babies in the hopes that they will grow up to become brilliant data scientists. Based on the number of downloads on YouTube, there may be as many as 45 million of them waiting in the wings.

So, perhaps it’s not surprising that Apple chose music as the horse that it wanted its newest consumer product-cum-Siri-poweredAlexa-killer,” the HomePod, to ride.

It was probably not lost on the Apple HomePod team that the only thing people like doing more than listening to music is telling Alexa to play them a song.

In a survey of Amazon Echo “early adopters” conducted by Experian last fall, “play me a song” was her second most popular command, with more than a third (34 percent) asking Alexa to do that repeatedly throughout the day. Alexa’s most popular command, in case you’re curious, is “set the timer.”

When the HomePod was launched last Monday (June 5), it was described by CEO Tim Cook as the device that will “reinvent home music,” just like Apple did when it introduced the iPod in 2001 and iTunes in 2003, he said. Music, said Cook, is “in [Apple’s] DNA,” telling Bloomberg News:

“We wanted something that sounded unbelievable. I think when people listen to it, they are going to be shocked over the quality of the sound, and of course it does a lot of other things. But we wanted a really high quality audio experience as well.”

I don’t see it.

In fact, I have trouble seeing how the HomePod checks any of the boxes that Steve Jobs, Johnny Ives and Tony Fadell checked when they introduced the device that did, truly, reinvent music — the iPod and iTunes — back in 2001.

Here’s why. [Cue the background music.]

Do It Better Or Not At All

When I chatted with Tony Fadell at The Innovation Project in March, I learned something about the iPod’s origin that I never knew. Like many of the entrepreneurs I’ve  spoken with, he drew his inspiration from a personal friction.

Fadell was a DJ, and good DJs are only as good as the songs they spin up. In the late 90s there was only one way to be a great DJ with great songs — buy a ton of CDs, store them and schelp them and their clunky music players around to gigs. Fadell had a vision for a well-designed portable music player with a hard drive that could store legal copies of music downloaded from a music management system. At the time, portable music players were the not-so-nice-looking bulky MP3 players, and Napster was tempting way too many people into the habit of illegally downloading pirated music.

Fadell took his idea to Apple, and they weren’t all that enthused, still nursing their wounds from a few consumer product flameouts. Remember the Newton? Fadell persisted and was hired by Apple in early 2001, given a small team of people and a year to get a product to market.

When the first iPod was introduced in October of 2001, it was beautiful — described by analysts as “no thicker than a deck of cards” — with a hard drive that could hold 5GB of music. It was linked to Apple’s desktop music management system, iTunes.

Critics loved its design but not its $399 price tag.

In the eight weeks between its October launch and the end of 2001, Apple sold a mere 25,000 iPods.

But soon, the iPod’s standing as a cool consumer product — and compelling Apple-esque marketing — fueled its success as that elegant portable music player Fadell had envisioned. Apple sold nearly 600,000 iPods by the start of January of 2003, displacing just about every other portable player in the market, including Microsoft’s Zune.

And they did it by staying true to Job’s own design mantra — if we can’t make it better, we don’t do it.

Apple and team, unquestionably, made portable music better.

But it would be Apple’s iTunes software play in 2003 that would transform the iPod into the device that would, indeed, reinvent the consumer’s relationship with music — and the music industry along with it.

Before then, if a consumer wanted to listen to a song, she had to spend a bunch of money to buy the whole album just to get that one song (or get an illegal copy from Napster). Buying single tracks wasn’t an option. Jobs’ pitch to the record labels was to turn iTunes into a software and commerce platform that would allow consumers to do just that, and store and play them on their iPods. Record labels could then monetize the single tracks that consumers were getting illegally and free from Napster. The record companies, whose business model was effectively selling a single song for the price of a whole CD, weren’t initially keen on the idea of having an intermediary such as Apple hawking single songs for less than a buck each and wrecking the good thing they had going.

Jobs got a few to agree, and he opened the iTunes store in April of 2003 with 200,000 songs that consumers could buy for $0.99 each. In less than a week’s time, one million songs were downloaded — and a new relationship between the consumer and her music was born.

Seven months later, Apple went from selling 600,000 iPods to selling two million. Two years later, by January 2006, Apple had sold more than 20 times that many — some 42 million iPods. A software platform — iTunes — that provided access to millions of songs also drove sales of the iPod.

Five years into the iPod/iTunes launch — January 2008 — Apple reported that more than five billion songs had been purchased and downloaded from iTunes. They also reported that some 50,000 videos were either purchased or rented every day, too. Although iTunes made TV shows and music videos available to consumers starting in 2005, it wasn’t until the movie studios allowed access to their content in January 2008 that consumers could buy or rent movies there.

Life in the digital music and video lane was looking pretty good for Apple.

At the start of 2013 — now a decade since the iPod/iTunes launch — NPD reported that Apple’s 25 billion music downloads represented 69 percent of all digital music sales and 29 percent of all music sold, making Apple the largest music distributor in the country. The iTunes store turned out to be a cushy money maker for Apple, too. At the 2012 Q4 close, Apple reported $3.7 billion in sales — the commission from the sales of those digital products — for that quarter alone. Six months later, June of 2013, Apple would report that its iTunes store had 575 million active users.

Apple, with iTunes, had done to music stores what Amazon had done to bookstores — disrupt them out of existence.

But there was something else going on in 2013, hidden behind all of the iTunes PR.

 The Turning Point

“Digital Music Takes a Dive” was Rolling Stone’s magazine headline in January of 2014, reporting the results of Nielsen’s music report from the year before. Nielsen’s data showed that digital music sales had dropped for the first time in the decade since iTunes opened that market.

Two reasons were cited: a lack of blockbuster hits that consumers wanted to buy, and a 32 percent rise in streaming music. Digital downloads in 2015, the report said, had declined by 6 percent.

Both Pandora — the first mover in the space — and Spotify — the Swedish firm that innovated the music-streaming business model in 2008 — were growing in importance in the U.S. More than half of all internet users in 2013 had heard of Pandora, which got its start in 2000, and a third knew of Spotify, which got its start in the U.S. in 2011. Nearly half and a quarter, respectively, of those consumers reported that they had used the services in 2013.

Pandora and Spotify had seized the consumer’s love of all things “on demand” and their ownership of connected devices and created a new way for them to access music anytime and anywhere the mood struck them. The hypothesis was that giving consumers the freedom to discover new artists and songs and create their own playlists, without the risk of having to buy the song first and then download it to a specific device, would generate more exposure (and sales) for the artists and keep their own users sticky.

If that sounds familiar, it should. Making the experience between the consumer and her music a more personal one was the essence of Jobs’ pitch to record labels and artists in 2002.

But streaming music needed a business model that would keep the streaming music player’s lights on while paying artists for their music. This time, it would be Spotify that would do the reinventing.

Spotify designed a business model so that consumers could discover music and build playlists with as many songs as their ears could handle — for free — provided they also agreed to listen to ads. Listening to ads in between songs was an experience not dissimilar to how consumers listened to radio. Consumers could decide whether they were willing to trade off a few ads for free music — and if not, purchase an ad-free experience for $10 a month. Artists were paid in both cases.

In 2013, two years after their 2011 U.S. launch, Spotify would report an active user base of 24 million — six million of whom decided they wanted their music ad-free. That was up from 20 million and five million, respectively, at the close of 2012, not even six months earlier.

It also would represent the tipping point for how consumers would buy music in the future.

By June of 2015, the year and the month that Apple would introduce Apple Music, Spotify would report an active user base of 75 million, with 20 million paid subscribers.

By January 2017, Nielsen’s eagerly awaited 2016 music report would deal a devastating blow to the Apple iTunes model: it showed that digital sales were in a free fall, as “tech-savvy” consumers turned to streaming.

By the end of 2016, Nielsen’s data revealed that streaming had become 38 percent of total audio consumption and that streaming’s business model worked, too. The 76 percent increase in the volume of streamed tracks from the year prior was enough to offset the digital sales slump. In 2015, the music industry, overall, would report topline growth of 3 percent.

In many ways, it was Apple and the iPhone that gave streaming services the boost it needed, since those became the portable devices that consumers used to listen to their services. Apple saw this trend bearing down on them —  too little, too late. Apple countered in June of 2014 with a $3 billion dollar acquisition of Beats, its headset business, and the 250,000 streaming radio subscriber base that came along with it — and had largely failed as a streaming platform.

So, Now What?

When Apple introduced the world to the voice-activated HomePod last week, it reported having 27 million Apple music subscribers.

Three months earlier, in March of 2017, Spotify reported that its paid user base had grown to 50 million, which would put its active user base somewhere around 200 million (if you assume that it continues to convert roughly 25 percent of its active users to paid subscribers).

Two months earlier, in April of 2017, Amazon introduced the latest in its line of Alexa-powered Echo devices, the Look. The Look includes a touchscreen and is billed as a personal style assistant, helping consumers try things on and then helping them decide what looks best on them so that they can, of course, buy those things using Alexa. It’s been estimated that some 10 million consumers already own an Echo device and ask Alexa to play their music, including music from their Spotify playlists.

Apple, with HomePod, seems to be about selling premium-priced hardware and hoping that there are enough consumers with discerning ears and big checkbooks who will prioritize sound quality over everything else, including access to a voice-activated, smart, personal assistant — and one that can be asked to play music from their Spotify playlists. Tim Cook did say of the HomePod that “of course it does a lot of other things, which today sounds a lot like the basics of the Amazon Echo of 2014/2015: calling up sports scores, getting the news and weather or a list of restaurants nearby, setting the timer.

But what the HomePod doesn’t have, at least today, is a voice-activated music experience with Apple Music that’s different, including its once-exclusive access to Taylor Swift’s catalogue. Ms. Swift made news last week when she broke her exclusive-only deal with Apple Music and headed back to Spotify, the platform she once spurned for its ad-free model. Some say her timing was more related to the release of Katy Perry’s new album on Spotify than anything else. But if that’s true, then her move might also reflect concerns over a lack of exposure by being exclusive to a streaming music service that delivers an audience with eight times fewer users.

Amazon, with Alexa, on the other hand, is about building a platform and a voice-activated ecosystem capable of powering  commerce. It’s attracting consumers into that ecosystem with a variety of lower price point devices and 12,000 skills that a robust developer ecosystem has created for those consumers to discover and use. With these skills, consumers can play music from any streaming service, get the news and weather and buy things in one click from Amazon. The Echo speaker lacks the four-inch woofers and seven beam-forming tweeters that the HomePod boasts, but it also doesn’t make consumers ditch their carefully curated Spotify playlists and start from scratch, rebuilding on Apple Music with a device that they can only use at home, and by and large only to play music.

Analysts believe that Alexa and the Echo momentum puts it on the path to be a $10 billion business for Amazon in the next 2.5 years, driven in large part by the commerce transactions that those devices enable.

In many ways, Apple and its HomePod strategy shouldn’t come as a surprise.

Apple needs the HomePod to be a hit, despite its staggering market cap, envious cash cushion and  claims of making software/services sales. Apple makes more than 60 percent of its sales and its profits from selling hardware and has trained its investors to expect a steady stream of innovative devices every couple of years to feed the earnings beast.

And there it faces many challenges.

Sales of the iPhone worldwide are slipping slightly, while the shares of its competitors are growing. Some analysts have expressed concerns over the highly anticipated iPhone 8 as not having enough oomph to boost sales and keep them high long-term. Meanwhile, Samsung’s Galaxy 8 has given the iPhone some stiff competition, not only in the U.S. but on the global stage. This comes at the same time that consumer refresh cycles for the iPhone and iPad have lengthened everywhere, including China, where Apple’s business fell 14 percent last quarter.

Software and services, while extremely high margin, represent roughly 11 percent of Apple’s sales, and even there success stories are few and far between. Just about every software play that Apple has introduced independent of the App Store and iTunes has sputtered — iBooks, Apple News, Apple Music and Apple Pay. And, as I’ve said before, iTunes is falling on hard times. The new devices that Apple has introduced in an effort to pull through those sales by getting developers to play along, like the Apple Watch, have failed because they have failed to draw in consumers. Last month, Google, Amazon and eBay announced they’d remove their Watch apps from the platform.

The great 19th-century German philosopher, Friedrich Nietzsche, once said, “Without music, life would be a mistake.”

It remains to be seen whether betting the farm on a voice-activated, device-driven music player that can only be asked to play tunes from Apple Music will end up being Apple’s music mistake, in the age of connected devices and open ecosystems and developer communities and well-developed players with market share and devices that consumers own and like and can do much more.

For me, the only thing that I see now that the iPod and the HomePod share is a suffix.

The iPod solved a consumer and a music industry problem in 2001 and 2003 and, in so doing, reinvented music — and drove Apple’s sales of devices and digital products.

In 2011, Spotify saw an opportunity in an age of connected devices and mobility to change the way music was listened to and paid for, devising a business model that drove consumer adoption that was device agnostic.

In 2014, Amazon saw voice as the next big ecosystem to develop and used its own devices as a way to build a developer ecosystem and skills and consumer interest that could be taken to any device, including cars and the iPhone — and a business model that was more about the commerce that it could enable than the devices they might sell.

Finding a consumer problem and solving for it is why the iPod rocked our world sixteen years ago. In 2017, the HomePod feels, to me, more like a device that attempts to solve for an Apple problem — the need to make its latest hardware a hit — and not much else.

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