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Dr. Dre Has a Plan to Remake the Music Industry Dr. Dre Has a Plan to Remake the Music Industry

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Dr. Dre Has a Plan to Remake the Music Industry

The hip-hop mogul wants to do for online music what he did for headphones, but to make it work, he's going to have to persuade people to start paying for a product they're accustomed to getting for a free.

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The team behind Beats Music.(Getty Images North America)

Dr. Dre just persuaded an entire generation to pay more than $200 for headphones during a brutal recession. Now he's setting his sights on a tougher task.

The hip-hop mogul, backed by a coalition of high-profile music industry veterans, is attempting to solve a problem that has thus far vexed the struggling music industry: creating a streaming music service that makes big money while still putting cash back in artists' pockets.

 

Dre's "Beats Music" streaming service—a name that builds off his successful "Beats by Dre" headphones—launches Tuesday.

The stakes are high: Streaming has long been "the future" of the music industry, as record sales sag in favor of online downloads. Further adding to the industry's woes: Digital music sales are down for the first time since iTunes launched in 2001 as customers turn to streaming services instead.

But while streaming has long been seen as the future of the music industry, it has thus far been more potential than profit. Streaming grew 32 percent in 2013, according to the Nielsen Soundscan, but the business's big names—namely Pandora and Spotify—reported annual losses. And it's no picnic for artists either, who complain about the tiny returns they see when streaming customers listen to their songs.

 

Dre, nee Andre Young, thinks he can turn the corner.

At first glance, Beats sounds pretty similar to Spotify. For $10 per month, Beats' subscribers will be able to access a catalog of 20 million-plus songs, a selection approximately the same size as Spotify's. Like Spotify, subscribers can make their own playlists, or listen to playlists tailored for their tastes. Beats is made to the smartphone age, with a sleek, mobile-first interface.

But what Dre, alongside partner and fellow music biz whiz Jimmy Iovine, hopes will separate Beats from the competition is its team's deep understanding of music. While Pandora and Spotify use computer algorithms to pick the next song on your playlists, Beats has a team of in-house music aficionados to back up its algorithms.

"It's all about what song comes next," Iovine told news website All Things D, "Everyone wants to know what song comes next."

 

And then there's Beats' major difference: Dre isn't giving anything away for free.

Spotify has over 24 million subscribers worldwide, but only a quarter of those are paying subscribers. The rest use Spotify's free, ad-based service, which earns significantly less that its subscriber services. Beats, however, is betting entirely on subscribers.

It's hard to compete with free. Without a free, ad-based alternatives, skeptics question Beat's pie-in-the-sky, entirely paid business model and doubt its ability to gain traction.

Beats expects to make up the difference through a mix of star power, corporate partnerships, and expanded demographics.

Beats has a plum agreement with AT&T—a coveted corporate partnership for an industry moving toward mobile—that gives Beats direct access to the telecom's 108 million customers, making it easy to bundle Beats' fees with phone bills. A $15 per month family plan allows up to five accounts.

Beats has also partnered with Ellen DeGeneres and Target, and it plans to run an ad during the Super Bowl.

Along with Iovine—who began his career as the sound engineer for Bruce Springsteen's Born to Run album—other music industry veterans are getting involved in the marketing, including Nine Inch Nails frontman Trent Reznor, Ian Rogers, a pioneer of music technology, and Luke Wood, a former music label executive. 

Marketing on this scale is unprecedented in the streaming music world, according to Steve Marks, chief of digital business and the general counsel for the Recording Industry Association of America. This kind of marketing is a good thing not only for Beats but for the service in general because it has the potential to educate a new population, said Marks.

The streaming customer base is currently dominated by tech-savvy music connoisseurs on the two coasts, but Beats' marketing blitz transcends age, gender, and socioeconomic groups. Think moms, not hipsters.

"Our angle on it was families," said David Christopher, the chief marketing officer of AT&T Mobility, told The New York Times. "We think there's a big opportunity here to change the way people think about music."

But even if Beats can build customers, that's only the beginning. Licensing fees and royalties are the No. 1 reason music streaming services are not profitable.

Current music copyright laws are complicated and often antiquated. The rules' structure dates back to analog CDs and radio, and they don't make anyone happy. As the music industry moves towards digital, copyright laws are like a leaking bucket that keeps getting patching patched, but really needs to be replaced.

Spotify reported last month that 70 percent of the money it brings in goes right back out into the hands of the major record labels. They are losing less money as their subscription base grows, but most of their consumers are signed up for their free, ad-based service.

Recording artists are crying foul as they watch their royalties dwindle from a few cents per song to a microcent per stream.

Each time a song is purchased on iTunes, an artist gets 7 to 10 cents after royalties are divided up between the record label, publisher, and songwriter. Each time that song is streamed on Spotify, an artist receives between 0.64 cents and 0.8 cents per stream.

That seems like a massive downgrade, but advocates for music streaming are playing the long game. Moving to a model based on music streaming requires a paradigm shift in the way the industry understands its earnings, according to advocates. 

The streaming business is in its infancy, said Marks, and once it matures, streams could be in the 100 of millions. Pennies add up quickly. If streaming services can garner enough paying subscribers to tip the scale, there could be enormous revenue promise.

The old model was more like a lake–a significant amount of money from onetime transaction between an artists and a consumer pooled up quickly. But in the streaming model, like its name implies, artists' earnings are ongoing.

Although Dre and Iovine are banking on their reputation among artists and record labels alike to bring credibility to the music streaming business, there isn't much they can do to change how much artists earn. Even with deep industry connections, they will likely still have the pay the same upfront licensing fees to the major record labels that Spotify and the rest have to pay.

But if Dre and Iovine are able to replicate the success of Beats Headphones, they might be able to move the needle on the copyright conversation. Power is in numbers.

In this growing ecosystem of services, a Beats victory is a victory for the entire streaming industry.

"Some people think the service providers are afraid of competition," said Greg Barnes, general counsel and director of government affairs at the Digital Media Association. "It's the exact opposite. We welcome competition. As the ecosystem grows, there are more consumers to begin to question why this ecosystem looks this way."

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