Beats Has a Secret Weapon to Decimate Spotify, iTunes

The question is, will it work?

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Ethan Miller / 2014 Getty Images

A Beats by Dr. Dre CES after party at the Light Nightclub at the Mandalay Bay Resort and Casino on January 9, 2014 in Las Vegas, Nevada.

The hype is building for Beats Music, the streaming service launching Jan. 21 from  Jimmy Iovine and Dr. Dre. The Beats co-founders have been making the case for the importance of using human curation—and not the just computer algorithms relied upon by rival services—to craft an engaging music listening platform. But the company has carved out a bigger advantage: they’ve partnered with AT&T to try to bring music streaming to the mass market.

Since it started selling electronics in 2008, Beats has reinvented the plebeian headphone and redefined, in particular, how much consumers are willing to pay for a pair. As a result, the Santa Monica, Calif.-based company’s revenues surpassed $1.2 billion last year. According to research firm NPD, Beats controls almost a third of the $1.8 billion U.S. headphones market and a whopping 61% of ‘premium’ sales, or headphones that cost $99 or more. Last fall, private equity giant Carlyle Group invested $500 million in the company to help fuel further expansion—including the new music streaming service, arguably the firm’s biggest gamble yet. (For more, read Watch Out Google and Apple, Here Comes Dr. Dre in this week’s magazine.)

But it’s the deal with AT&T, that could be the company’s secret weapon. Three days after Beats Music launches, AT&T will also begin selling the service. In addition to letting customers add a regular, $10 Beats Music subscription to their monthly wireless bill, the company will sell a discounted $15-per-month family plan that allows up to five people to use Beats (a savings of $35 per month compared to five individual Beats subscriptions). Extended free trials will also be available for AT&T customers.

The deal, the financial terms of which have not been disclosed, will give Beats instant access to some of AT&T’s 110 million wireless subscribers. That could help it gain a foothold not only with people who currently use streaming services like Spotify and Rhapsody, but also with the vast majority of Americans who have never bought a music subscription. “We think we’ll expose streaming services to a much broader audience,” says AT&T Mobility Chief Marketing Officer David Christopher, who hashed out the deal with Iovine over the last two years. “We’re going to market this in a big way. Our reps will be fired up about the service and they’ll be talking to customers about it.”

(MORE: Spotify and YouTube Are Just Killing Digital Music Sales)

Streaming music startups are hungry for bundling deals with cell phone carriers, which they see as the easiest way to scale their businesses. Spotify offers similar bundle deals to the Beats-AT&T partnership in several markets in Europe, and the streaming service currently has a marketing deal with Sprint in the U.S. Customers can directly bill their Spotify subscription fees to other carriers as well, including AT&T. “Every major digital music service that you might care to came have dedicated senior executives whose mission is to do nothing but bundling deals with mobile operators,” says Larry Miller, a music business professor at New York University’s Steinhardt School of Culture, Education and Human Development.

These types of bundles have found some success with music fans. Last fall Spotify’s head of telco partnerships announced that 80% of customers that are offered Spotify for a year through their mobile carriers continue to pay for the service months after the deal expires. Cricket Communications, a small U.S. wireless carrier, automatically includes a music download service called Muve Music in all of its smartphone cellular plans. The service has gained two million subscribers since 2011. “Consumers already have a subscription relationship with their wireless carrier, so adding music is a natural extension,” Tyler Wallis, the general manager of Muve Music, wrote in an email.

The cell phone carriers benefit from the partnerships too. Now that popular handsets like the iPhone are no longer exclusive to a specific wireless service, companies are looking for new offerings to differentiate themselves. Tying subscribers to a music service (especially a discounted one) will give them one more reason to stick with the same carrier. “If even a relatively small percentage of AT&T wireless users choose to either sign on or stay with AT&T for an additional contract period, it can absolutely swing their operating performance in a fairly dramatic way,” Miller says. Streaming services also entice users to spend more money on mobile data usage, a growing source of revenue for the telcos.

(MORE: Here’s How Much Money Top Musicians Are Making on Spotify)

More than 118 billion songs were streamed in 2013 across an array of existing services, up 32 percent from a year earlier, and Miller estimates there are already 200 million user accounts streaming music via the largest service providers—with about 29 million paying customers according to ABI Research. In 2012, streaming music services were already generating a healthy $1 billion for the U.S. music industry, according to the Recording Industry Association of America.

Striking a deal with a carrier is hardly an automatically recipe for success. Everyone from Rhapsody to Napster  have launched various deals with wireless carriers in the past that failed to catapult those services to wide success. Even MOG, the now defunct service Beats bought for a reported $14 million two years ago and on which Beats Music is partly based, tried a similar maneuver.

But those promotions didn’t come with  big discount offers and weren’t integrated into a heavily marketed product rollout. It remains to be seen whether Beats’ product will be able to thrust the relatively niche market of paid music streaming into the mainstream.  “I would never discount Jimmy [Iovine]’s ability, especially with the brand infrastructure that exists at Beats Electronics now, to package and sell something cool and highly impactful to millions and millions of people,” Miller says. In other words, he’s done it before.

Join TIME for as little as $2.99 to read “Look Out Google and Apple, Here Comes Dr. Dre.”

7 comments
gu333uf
gu333uf

I also love MOG and will miss it very much. It streams at much better quality than the other services and does so on platforms other than phones. Who really wants to listen to music on a freaking phone.


Dream paradise and they put up a parking lot.

bigjohn.mtnj
bigjohn.mtnj

I LOVE MOG

I have over 250 Favorite Artists and 225_ Favorite Albums

With MOG Radio, I can have a playlist where I can have sliding scale from 100% that artist to 100% related artists/music.

I listen thru my iPhone and also my iPod

I also listen to MOG on my 5 zone Sonos system at home

This has been AWESOME for me for the past 4 years.

I have discovered so much music that its almost overwhelming.


Beats is killing that whole concept.

I've tried Beats for 14 days - 

It TOTALLY SUCKS compared to MOG

They are killing an Awesome, Incredible, Amazing service.

BEATS SUCKS

JSChicago
JSChicago

"Even MOG, the now defunct service Beats bought..." 


MOG is not defunct.  I am listening to it as I type this.

DeweySayenoff
DeweySayenoff

This is a lot less about who's involved with this music plan than that AT&T wants to blow everyone's data plan limit and get richer.

People who are brain dead enough to stream music on a data plan pretty much deserve to be taken advantage of, but while Darwin would approve, I'm sure we'll be hearing from the brain dead masses who were ripped off because of this.

Also, is it me, or was this phrase a bit too creepily revealing:

The deal, the financial terms of which have not been disclosed, will give Beats instant access to some of AT&T’s 110 million wireless subscribers.

Isn't that supposed to be giving 110 million AT&T fish in a barrel access to Beats, instead?  I mean, it sounds GREAT for Beats.  It sounds like it seriously sucks for the customers.

As long as I have SD cards, I have music.  Why the hell would I want to stream that, let alone have it be someone else's crap?

Dude_who_cares
Dude_who_cares

All I hear is customer abuse in this article. So you will get auto signed up for Beats, it will be free except for the pesky part about how much your data plan is, and streaming music on a 256mb data plan is not going to take long before you get gouged for going over the limit. That's where AT&T makes their money. As for Beats, they make it by gouging you when you forget to cancel your "free" subscription. What a joke, paying for metered internet service is the biggest hose job around.

Neiihn
Neiihn

@BorisIII That is exactly what they do. They are junk for the price range they are in. They are much better suited for a price range HALF of what they currently sell for in terms of quality vs performance. Sennheiser and several other makers have better performing headphones then any of the Beats. And even their cheaper ones perform better. I have Sennheiser 550-X but I also have a set of Beats Studios that was given to me by my employer at the time, and I have let people hear the difference and once they do they realize just how bad the Beats are. Beats sells based on the Dr. Dre name alone. Anyone that cares about quality avoids them. 

BorisIII
BorisIII

I'm guessing the reason Beats headphones con't give technical information of their head phones on the boxes is because they are not very good.  Probably just expand the base and treble like Bose does to make it seem like it sounds better to an untrained ear.