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.”
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 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.
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