LOS ANGELES — Apple's $3 billion purchase of Beats sheds light on a rarely recognized reality in the streaming music industry: It's hard to succeed without offering other products and services.
Streaming music companies like Beats Music, which charge users up to $10 a month, can sometimes pay as much as 70 percent of their revenue in artist royalty fees. That leaves little for advertising and promotional campaigns to explain the benefits of paying for a music service.
''The only people that can afford to get into this business have other main businesses,'' says Mark Mulligan, an analyst and blogger with MIDiA Consulting. ''Every service ends up putting itself into significant debt just to cover its basic operating costs.''
Even the streaming leader, Spotify — with 10 million paying customers worldwide — is reportedly burning through cash as it seeks to attract enough subscribers to turn a profit. With just 250,000 subscribers, analysts say, Beats Music is far from that goal.
Though analysts say that Apple's purchase is largely an acquisition of talent and a way to offset the declining popularity of iTunes song downloads, the company notes its main source of revenue has always been devices. Music is just a hook to make those devices more attractive.
Observers say Apple's purchase of Beats could have positive and negative effects for other streaming companies.
If Apple Inc. pushes hard to promote streaming music subscriptions and makes the idea more acceptable to a broader audience — including those who currently purchase downloads or acquire pirated music — the effort could help all music services.
After all, Apple has been the driving force behind many new products. It popularized digital music players with the iPod, gave birth to the smartphone era with the iPhone, and spurred demand for tablets with the iPad.
''We're cheering from the sidelines,'' says Paul Springer, senior vice president at Rhapsody International, with 1.7 million paying subscribers. ''When the most valuable company in the world says that music subscriptions are strategic to its future, that's great for our sector."
Even so, there's a downside. Apple could devalue music subscriptions by running the service at a loss because it makes plenty of money elsewhere. And Apple is likely to advertise and possibly offer bundled discounts to make Beats Music a bigger force.
Even before Apple jumped in, the paid streaming music business was in a squeeze. Spotify reportedly lost $80 million in 2012. Its results for 2013 are due soon. Rdio last year sold a 15 percent equity stake to radio station network operator Cumulus Media in exchange for $75 million of on-air advertising — acknowledging that cash flow wasn't enough to pay for marketing.