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Apple Means Business: Deciphering the Latest Moves

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Apple Means Business: Deciphering the Latest Moves PART 1 OF 11

Why Apple Aims to Reduce Its Label Distribution

Altering revenue sharing structure

Apple (AAPL) has reportedly been trying to lower the share of Apple Music revenues (QQQ) that it pays out to record labels—the suppliers of the content it uses for its music streaming service.

According to Bloomberg, the prior agreements that Apple had with record labels were set to expire at the end of June 2017, and now Apple aims to adjust the revenue sharing structure in its new contract negotiations with labels.

Why Apple Aims to Reduce Its Label Distribution

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Under the old agreement, Apple surrendered 58% of Apple Music revenues to labels. Apple charges $10 per month for an Apple Music subscription, while a family plan costs $15 per month. Remember, the music streaming business is a big opportunity for Apple to reduce its reliance on smartphone sales as it faces escalating competition from Samsung (SSNLF), Microsoft (MSFT), and Alphabet’s (GOOGL) Google.

27 million paying subscribers

More than 27.0 million people pay for Apple Music. Spotify, the market leader, last updated that it has exceeded 50.0 million paying subscribers on its streaming music service. Apple also competes with Pandora (P) and Tidal in the music streaming business.

In its new contract talks, Apple was seeking to pay labels 52% of revenues instead of 58%. Spotify now pays 52% of its streaming music revenues to labels, after having previously paid 55%.

Reasons for wanting lower rates

It appears that Apple wants to reduce the fraction of Apple Music revenue it pays labels not only to match Spotify’s rate but also because it no longer needs to prove itself as a streaming service—Apple Music has shown itself to be a lucrative opportunity for labels.

Continue to the next part of this series for a look at what this new move could mean for Apple.

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