HomePod Mini: Apple’s pandemic-era product

Apple’s Tuesday product announcement showcased its 5G iPhones, but also included the launch of the new $99 HomePod Mini. Though it might have looked like a supporting act for the launch, its strategic importance should not be underestimated – especially in the context of how Apple competes with Amazon, the company that is arguably becoming Apple’s most important competitor among the Western Tech Majors (Apple, Alphabet, Amazon, Facebook). Amazon is emerging as a global scale hardware competitor, focused on the home rather than on personal devices.

HomePod Mini is a product for the era of pandemic

The home is becoming the new battleground for the tech majors and Amazon has a comfortable lead with more than 50% of the installed base of smart speakers, significantly ahead of Google and far ahead of Apple which currently sits at less than 10% market share. HomePod Mini is an affordable device that gives Apple the opportunity to quickly expand its role across the homes of iPhone owners, a beachhead for future content and services. HomePod Mini is also very much a pandemic-era product move; with more of us spending more time working and studying from home, we are more inclined to use specialised home devices such as smart speakers, rather than the convenient but not specialised phone. As the HomePod was always a premium, Apple afficionado device, HomePod Mini gives Apple a tool with which it can extend its footprint in the average day of its increasingly home-bound iPhone owners.

An enabler for audio strategy

Though Apple has much bigger ambitions for the home than music alone, music is the use case that is spearheading the product strategy. Apple TV continues to grow in importance for Apple, but as a screen plug-in, it lacks the capabilities of a standalone smart speaker. As Amazon has shown, smart speakers can become the digital hub around which smart home strategies can be built. HomePod Mini may also be the tool for a bolder, joined-up audio strategy for Apple. Alongside Apple Music, Apple continues to back its radio bet Apple Music 1 (previously Beats 1) and of course it is one of the leading destinations for podcasts. Apple can pull these three disparate strands together by creating in-home use cases via HomePod Mini. In this respect, Apple will need to, once again, do all of that and more – as not only has Amazon recently added podcasts to Amazon Music, but it also the home of Audible, an asset both Apple and Spotify lack.

Finally, what Apple did not announce on Tuesday was content bundles for its hardware. An Apple One / iPhone device lifetime bundle feels like an obvious move – competition authorities permitting, perhaps sometime over the coming 12 months. A $3.99 Apple Music Home Pod tier would make sense also.

The device may be mini, but the strategy is anything but.

Quick Take: Apple One – Recession Buster

Apple officially announced its long anticipated all-in-one content bundle: Apple One. $9.99 gets you Apple Music, Arcade, Apple TV+ and 50GB of iCloud storage. A family plan retails at $14.99 and a premier plan includes 1TB storage, News and Apple’s new Fitness+ service. While the announcement was expected (and you may recall that MIDiA called this back in our December 2019 predictions report) it is important nonetheless. 

As we enter a global recession, the subscriptions market is going to be stressed far more than it was during lockdown. With job losses mounting, and many of those among Millennials – the beating heart of streaming subscriptions – increased subscriber churn is going to be a case of ‘how much’ not ‘if’. In MIDiA’s latest recession research report, we revealed that a quarter of music subscribers would cancel if they had to reduce entertainment spend and a quarter of video subscribers would cancel at least one video subscription.

A $15.99 bundle giving you video, music, games and storage will have strong appeal to cost conscious consumers who are loathe to drop their streaming entertainment but need to cut costs. As with Amazon’s Prime bundle, Apple One is well placed to weather the recession. They may not be recession proof – after all, entertainment is a nice-to-have, however good the deal – but they are certainly recession resilient.

Which may explain why music rights holders have been willing to license the bundle which almost certainly included a royalty haircut for them, to accommodate the other components of the bundle. While rights holders will not have been exactly enthusiastic about further royalty deflation (one for artists and songwriters to keep an eye out for when Apple One starts to gain share) they are also keenly aware of the need to ensure they keep as many music consumers on subscriptions as possible. 

One key learning of the impact of lockdown has been that new behaviours learned during a unique moment in time (eg not commuting to an office, doing more video calls) can result in long term behaviour shifts. Lower music rightsholder ARPU may be a price worth paying for shoring up the long term future of the music subscriber base.

Apple to launch subscription bundle – we called it!

In MIDiA’s 2020 Predictions report published in December 2019 we predicted that tech majors would start creating subscription bundles, with Apple leading the fray. Lo and behold, news has just come out that Apple is working on ‘Apple One’ – a multi-genre subscription bundle that will include Apple Music, Apple TV+, Apple Arcade and Apple News+.

This is what we said back in December:

“Expect Apple to experiment with paid bundles. Adding TV+ to its student Apple Music package is another test case and may soon see Arcade folded in also. With a global recession looming, Apple and Amazon will be well placed to grow market share.

We called it!

So why is Apple doing this, and why now?

With smartphone sales slowing, Apple needs another growth driver to maintain revenue growth. It is making this move now because, one, it needs the transition to start soon, and two, it is looking to profit from the recession. Standalone digital subscriptions are contract-free and so are vulnerable to cancellation. Additionally, they skew towards Millennials – the segment most likely to be hit hardest by any workforce reductions. Consumers who find themselves having to tighten their belts will not want to simply ditch their digital entertainment, however – it has become too important to them. So, a multi-subscription, value-for-money bundle will become particularly appealing during a recession. Apple is thus hoping to pick up price-sensitive subscribers during the economic downturn.

Apple also has an ace up its sleeve: device bundles. As we wrote in December:

“Currently, Apple’s mix of premium, standalone subscriptions are educating its user base that they have a clear monetary value. Apple will start to bundle these together with devices in order to maintain revenue growth in its otherwise slowing device sales segments. The initial bundling of Apple TV+ for free for one year may help acquire market share but it also lays the ground for a more comprehensive and structured bundling strategy. By tying subscriptions into long-term, need-to-have relationships – i.e. phones and shipping – […] tech majors could gain at the expense of standalone subscriptions.

Bundling used to be the sole domain of Telco’s but the tech majors are looking to get in on the act. Apple can use Apple One to increase device prices, e.g. pay $200 more to get an iPhone with a lifetime of unlimited music, video, games and extra cloud storage. By doing so it both increases device revenue (and after all, Apple is still a device company and is measured that way by investors) and taps into an entirely different purchase decision cycle. Devices are need-to-have and if you are in the market for a high-end device, adding on 15% for unlimited content is a much easier sell than trying to sell the subscription standalone.

In doing all of this, Apple is of course taking a leaf out of Amazon’s book. Amazon has built the core of its streaming businesses around the Prime bundle. In doing so, it has the additional benefit of creating a recession-proof bundle (everyone still needs to buy stuff) – one which is proving its worth already, if it’s incredibly successful Q2 is anything to go by. As we enter the recession, standalone subscriptions like Spotify and Netflix are vulnerable to increased churn. Apple and Amazon will be waiting to pick up the pieces.

Just what is Tencent’s Endgame?

tencent logoTencent’s combined $200 million investment in WMG follows on the heels of its $3.6 billion joint investment in Universal Music. It is hardly Tencent’s first investments in music, having spent $6.2 billion on music investments since 2016. But music is just one part of a much larger, supremely bold and undoubtedly disruptive strategy that is making the Chinese company an entertainment business powerhouse in the East and West alike.

Tencent is a product of the Chinese economic system

Tencent being a Chinese company is not incidental – it is pivotal. The Chinese economy does not operate like Western economies. Rather than following free market principles, it is a controlled economy in which everything – in one way or another – ultimately comes back to the state. In China, the economy is an extension of the state. The state takes an active role in the running of successful Chinese companies, sometimes very openly, sometimes in less direct ways, such as ensuring party nominees end up in management positions.

Chinese companies are used to working closely with the state – in its most positive light – as a business partner. When a company’s objectives align with those of the state, an individual company may gain preferential treatment at the direct expense of competitors. This is exactly the opposite way in which state involvement happens in the West (or is at least supposed to) – i.e. regulation. Tencent has benefited well from this approach, not least in music.

Tencent Music is the leading music service provider in China (78% market share in Q1 2020) and is also the exclusive sub-licensor of Universal, Sony and Warner in China. This means that Tencent’s streaming competitors have to license the Western majors’ music directly from it. Tencent clearly has a market incentive to ensure terms are less favourable than it receives itself. Netease’s CEO call the set up ‘unfair’ and regulatory authorities are at the least going through the motions of investigating. But the fact this set up could ever exist illustrates just how different the Chinese regulatory worldview is.

Investing in reach and influence

Why this all matters, is that when Tencent views overseas markets it does so with a very different worldview than most Western companies. Taking investments in two of the world’s three biggest record labels might feel uncomfortable from a Western free-market perspective, but to Tencent it just makes good business sense to have influence over as much of the market as it can get. What better way to help ensure you get good deals in the marketplace? Such as, for instance, exclusive sub-licensing into China.

Music is not Tencent’s main priority. For example, its combined $6.2 billion spent on music investments is less than the $8.6 billion that Tencent spent on acquiring 84% of gaming company Supercell in 2016). Nonetheless, music – along with games, video, messaging and live streaming – is one of the central strands of Tencent’s entertainment portfolio strategy.

Just as Apple, Amazon and Alphabet are building digital entertainment portfolios designed to compete in the ‘attention economy’, so is Tencent. In fact, it is fair to say that Tencent is prepping itself as a direct competitor to those companies. But while each of the Western tech majors compete in familiar (Western) ways, Tencent is taking a more Chinese approach.

If you don’t like the rules of the game, play a different game

Tencent’s entertainment investment strategy can be synthesised as follows:

  • Take (predominately) minority stakes in companies to get the benefit of influence without having to shoulder the burden of ownership
  • Invest end-to-end across the supply chain, from rights through to distribution
  • Systematically invest in direct competitors so that they are all each other’s enemies but are all Tencent’s friend

This strategy has given Tencent access to and / or control of:

  • Audience (e.g. QQ, WeChat, Weibo, Snapchat (12%), Kakao (14%), AMC Cinemas – via its stake in Wanda Group),
  • Distribution (e.g. Tencent Music, Tencent Video, Tencent Games, Joox, Spotify (10%), Gaana, KuGou, Kuwo, QQ Music, Tencent Video, Tencent Games, Epic Games (40%)
  • Rights (e.g. UMG (<10%), WMG (1.6%), Skydance (5%–10%), Supercell (84%), Glumobile (15%), Activision Blizzard (5%), Ubisoft (5%), Tencent Pictures)

The Western tech majors have built similar ecosystems, acquiring the audience and distribution parts of the supply chain (e.g. iOS, YouTube, Instagram, Twitch, Apple Music) but only rarely getting into rights (e.g. Apple TV+ originals) and never systematically investing in competing rights holders.

The Western tech majors may have often tetchy relationships with rights holders but their strategic focus (for now at least) is to be partners for rights holders. Tencent’s strategy is one of command and control: vertical supply chain integration secured through the sort of behind-closed-doors influence that billions of dollars’ worth of equity stakes get you.

Tencent may be the future of digital entertainment

Tencent is building the foundations of being one of – perhaps even the – global digital entertainment powerhouse. By taking stakes in two of the Western major labels, Tencent broke the unspoken gentleman’s agreement that streaming services and rights holders would remain independent of each other in order to ensure the market remains open and competitive. Now the Western tech majors have to choose whether to continue playing the old game or to get a seat at the table of the new game. Back in 2018 MIDiA predicted that over the coming decade Apple, Amazon or Spotify would buy a major record label. Maybe that prediction is not quite so outlandish anymore.

The COVID Bounce: How COVID-19 is Reshaping Entertainment Demand

The economic disruption and social dislocation caused by the COVID-19 pandemic is not evenly distributed. Some business face catastrophe, while others thrive. Across the entertainment industries the same is true, ranging from a temporary collapse of the live business through to a surge in gaming activity. As we explain in our free-to-download COVID-19 Impact report, the extra time people have as a result of self-isolation has boosted some forms of entertainment more than others – with games, video and news the biggest winners so far.

midia research - the covid bounceTo further illustrate these trends, MIDiA compiled selected Google search term data across the main entertainment categories. The chart below maps the change in popularity of these search terms between the start of January 2020 up to March 27th. Google Trends data does not show the absolute number of searches but instead an index of popularity. These are the key findings:

  • Video streaming: All leading video subscription services saw a strong COVID-19-driven spike, especially Disney+ which managed to coincide its UK launch with the first day of national home schooling.
  • Music streaming: Little more than a modest uptick for the leading music services, following a long steady fall – reflecting a mature market sector unlike video, which has been catalysed by major new service launches.
  • Video demand: With the mid- to long-term prospect of a lot more time on their hands, consumers have been strongly increasing searches for TV shows, movies and games to watch and play. The fact that ‘shows for kids to watch’ is following a later but steeper curve reflects the growing realisation by locked-down families that they have to stop the kids going stir crazy while they try to work from home.
  • Music demand: Demand for music has been much more mixed, including a pronounced downturn in streams in Italy. Part of the reason is that music is something people can already do at any time in any place. So, the initial instinct of consumers was to fill their newfound time with entertainment they couldn’t otherwise do at work/school. As the abnormal normalises music streaming will pick up, as the recent increase in searches for music and playlist terms suggests. Podcasts, however, look like they will take longer to get a COVID bounce.
  • Games: Games activity and revenues have already benefited strongly from the new behaviour patterns, as illustrated by the fast and strong increase in search terms. However, the recent slowdown in search growth suggests that the increase in gaming demand may slow.
  • News: The increased searches correlate strongly with the growth of the pandemic, but the clear dip at the end provides the first evidence of crisis-fatigue.
  • Sports: The closure of all major sports leagues and events has left a gaping hole in TV schedules and the lives of sports fans. The sudden drop in search terms shows that sports fans have quickly filled their lives with other entertainment and have little interest in keeping up with news of sports closures.
  • Leaders: Finally, Boris Johnson has seen his search popularity grow steadily with the pandemic, while Donald Trump’s has dipped.