Carriers ride the wave of streaming music services - but their strategies are out of tune

Phil Goldstein

Music is making a comeback in mobile, with U.S. carriers increasingly embracing streaming music services as enticing parts of their overall offerings. Yet unlike the heyday of carrier-branded music stores of the 2000s, today carriers seem to be partnering with streaming services as a way to reduce churn and hold onto their customers rather than generate significant new revenue streams.

It's a strategy that could help the carriers maintain their subscriber bases amid intensifying competition on price, but it's not going to win them many awards for creativity--or push them to offer new kinds of services.  

After all, music is old hat when it comes to mobile. AT&T Mobility (NYSE: T) and its predecessors, notably Cingular, have been dabbling in mobile since 2003. The Cingular Music store was launched in 2006. Sprint (NYSE: S) launched its Sprint Music Store in late October 2005 and Verizon Wireless (NYSE: VZ) launched V CAST Music in January 2006.

The advent of the iPhone and smartphones in general obliterated the model of--and need for--carrier-controlled music stores. And streaming music apps have been gaining ground steadily over the past few years against traditional download-based music services. Here's a snapshot of where the carriers stand now:

  • AT&T in January struck an exclusive deal with Beats Music to offer AT&T customers on family plans a discount on the streaming service (Apple (NASDAQ: AAPL) has since announced plans to buy Beats Music parent Beats Electronics for $3 billion.) It's unclear how many subscribers AT&T has signed up--spokeswoman Mari Melguizo declined to say--but Beats revealed in late May it had 250,000 paying subscribers. AT&T offers an individual plan for $9.99 per month (one user and up to three devices), and the first 30 days are free. The carrier's family plan for Beats goes for $14.99 per month (up to five users and 10 devices), and the first 90 days are free. Interestingly, AT&T is also considering selling the Muve Music business it acquired via its purchase of Leap Wireless and Leap's prepaid Cricket brand.
  • In May Sprint teamed with streaming music service Spotify, which has 10 million paying subscribers worldwide. Under the teaming, all customers on Sprint's Framily calling plans get a free, six-month trial of the streaming music service. Once the trial is over, they get Spotify at the discounted rate of $7.99 per month for Framily calling circles of 1-5 members; for 6-10 member circles, the price drops to $4.99 per month. However, after 24 months customers then must pay the standard Spotify price (currently $9.99 per month). Non-Framily Sprint customers will get a three-month free trial of Spotify and can pay the standard $9.99 per month after that.
  • T-Mobile US (NYSE:TMUS) upped the ante in June. Under its "Music Freedom" plans, T-Mobile is offering its Simple Choice customers unlimited access to six music streaming services, including Pandora, Slacker, iHeart Radio and Spotify, without incurring data charges on their LTE plans. Samsung's Milk Music and the forthcoming Beatport music app from SFX will also be offered to customers free of data charges. T-Mobile is also inviting subscriberss to help decide which services to add next via an online poll. "We have every intent of moving every streaming service that people use over," T-Mobile CEO John Legere has said. Further, T-Mobile introduced Rhapsody unRadio that T-Mobile said lets users listen to songs as much as they want, online and offline, without ads. Rhapsody unRadio is included in T-Mobile's $80 per month unlimited plan and costs $4 per month for all other plans.
  • Verizon does not have a specific relationship with any streaming music service but supports a wide range of third-party apps that customers can use on its network, spokeswoman Debi Lewis said.

All of the carriers are taking different approaches to streaming music, but analysts said that all of the moves add up to a concerted effort to make their overall service "stickier" and entice customers to stay. "It's becoming harder and harder to find customers," Current Analysis analyst Weston Henderek said. "Carriers are doing more to hang onto customers they do have."

Henderek said last year the nation's carriers, driven by T-Mobile, moved to embrace device financing and no-contract pricing. "The next tier of differentiation is through services like music," he said. The overall goal though is to reduce churn and attract family plan subscribers, which are stickier in general, as evidenced by the discounts given to larger groups on AT&T and Sprint's offerings.

The next step could be to bundle music with other over-the-top services, such as Netflix (NASDAQ: NFLX) or an OTT messaging service, and either offer a discount or not count the data usage, as T-Mobile is doing with streaming music, Henderek said. Such plans would give carriers "more mechanisms to hold the line on pricing and potentially push [customers] up the pricing curve," he added.

556 Ventures analyst William Ho said he is skeptical of the idea of bundled OTT apps. "How many times have bundles worked in the past?" he said, noting that app packs have never truly taken off, despite Sprint trying with Sprint ID.

Ho thinks music has come full circle on mobile and that it is "something that mobile subscribers still gravitate towards. How you make a buck on it is the question." In some cases they can take a cut of the subscription fee or make a percentage based on direct carrier billing.

The carriers' recent efforts on music are likely about churn reduction more than anything else--giving customers another reason not to leave. With the exception of T-Mobile's offer, none is really that creative--and zero-rating data is itself not exactly a new concept. Macquarie analyst Kevin Smithen wrote in a recent research note that Sprint and T-Mobile are likely going to "push lower-usage music apps in order to lower churn in urban centers where they have (or will have in Sprint's case) spectrum and network advantages over" AT&T and Verizon. Sprint and T-Mobile don't have the home video and content resources of the larger carriers, so they're essentially fighting back with what they have.

Will the carriers' embrace of streaming music services net them massive amounts of new revenue? Probably not. Does their pursuit of new revenue or desire to combat churn via music-based services get them off the hook for not providing more innovative services? Definitely not. But will the carriers keep pursuing these strategies if they are indeed lowering churn? At this point, I suspect that will be enough for them. --Phil