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What Apple Could Pay in Cutting Labels’ Revenue Rate

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Apple Music shows bright prospects

Apple (AAPL) has entered into new contract talks with music labels in an effort to reduce what it pays for supplying their content on Apple Music.

The old contract that Apple had with record labels was expiring in June 2017, and the company saw the opportunity to introduce new terms now that Apple Music has continued to show bright prospects.

In the music streaming business, Apple is competing for customers’ attention against Spotify, Pandora (P), Amazon.com (AMZN), and Tidal, which is backed by Sprint (S).

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Cutting label’s take-rate to 52%

According to Apple, more than 27.0 million people now pay for Apple Music. The number of people paying for the service was 20.0 million in December.

As Apple Music’s subscriber base expands, Apple gains more negotiation power with labels. The company has sought to reduce its revenue rate to 52.0% from 58.0%, according to Bloomberg. Notably, Spotify pays its label partners 52.0% of its music streaming revenues.

The cost of cost-cutting

While reducing labels’ revenue rate would allow Apple to retain more Apple Music revenue and potentially help lower expenses associated with running the music streaming business, these cuts would come at a cost.

In exchange for lower rates, labels will require Apple to meet conditions that could drive up expenses. For example, labels want Apple to invest in promoting music, including its own iTunes, to drive digital music sales in markets where streaming isn’t popular. Germany (EWG) and Japan (EWJ) are two markets where people still prefer purchasing digital music copies over streaming online.

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