Apple Music's Progress: A Positive Short-Term Indicator For Apple Inc.

  • Apple is developing its services segment to offset the revenue decline in the iPhone segment.
  • After the impressive progress with Apple Pay, Apple now focuses on its music service.
  • The company is challenging Spotify’s dominance in the music streaming market.

For a few quarters, Apple Inc. (NSDQ:AAPL) investors had focused on the company’s main businesses, from the iPhone cash machine to other emerging businesses like Apple Pay, Apple Music, and Apple Watch. In an earlier article, I described that change as an interim period until Apple will launch its next cash machine – the autonomous/electric Apple Car. However, for now, the company is trying to develop new markets and services to offset the sales decline of its Apple iPhone.

The Apple Watch and other new consumer electronic devices from Apple did not quite take off, so investors highlighted the services segment as the one to drive Apple’s future growth. There are two primary services that comprise that segment: Apple Pay and Apple Music. On the Apple Pay front, the company made tremendous progress, expanding its presence in Asia and Europe and launching Apple Pay for Safari, which enables web transactions to compete directly with PayPal. Apple Pay is slowly evolving as a major global e-payments player that could challenge PayPal and AliPay's dominance worldwide and generate substantial revenues in the future.

After the impressive progress made with Apple Pay, the company turned to strengthen its second primary service – Apple Music. The music-streaming market has many similar characteristics to the e-payments market: both of them include dozens of players in a very crowded market, with one or two distinct leaders and many newcomers trying to generate significant market share to monetize the market's expected growth. In the e-payments market, Apple targeted PayPal and AliPay, and in the music streaming market, Apple is targeting Pandora (P) and Spotify.

Spotify is currently the world’s largest paid music-streaming service, with more than 30 million paying users, compared with Apple Music’s 13 million paying users. However, Apple has one huge advantage over Spotify, which is the company’s extensive, worldwide ecosystem that is tightly controlled by the company, and while Apple can use that ecosystem to offer and promote its music services, other services which are mainly mobile-based, like Spotify, Tidal, etc., are dependent on Apple to be available for iOS customers.

A legal dispute that was uncovered lately by Bloomberg revealed that Apple allegedly took advantage of its unique position in the market and blocked an update to Spotify. This is a drastic move that an Apple spokesperson denied, but it highlights Apple’s incredible power in the music streaming market that goes beyond user growth and subscription sales. Moreover, Apple charges 25% of all payments initiated in its App Store, which means that Apple’s competitors all transfer some portion of the revenues to their rival – Apple. This is another huge advantage for Apple that benefits from the competition in the market either by attracting new paying users to Apple Music or by collecting its 25% fee from the App Store revenues of its competitors. Legally, the App Store is Apple’s proprietary asset, and it can block whatever app from it as it sees right; however, it might not be fully ethical to do so, and the move already attracted too much attention from lawmakers calling for greater scrutiny over Apple’s influence over the App Store content. Clearly, Apple is sending a message to Spotify that the Swedish company depends on it, and it should look for other alternatives to maintaining its growth besides the iOS ecosystem.

Spotify is also known for its problematic relationship with some of the world’s leading artists like Taylor Swift and Adele, who wanted to limit their music for the paid subscription and were refused by the company. In return, these two super-popular artists are only partially available on Spotify. To take advantage of this point, Apple contacted Tidal about a potential acquisition that will allow Apple to benefit from Jay Z owned tidal's strong ties with popular artists and potentially increase its user base at Spotify’s expense.

These steps look like a well-organized plan to take the lead in the music-streaming market and strengthen Apple's services segment alongside the progress with Apple Pay. Concerns about Apple’s ability to grow without exceptional iPhone sales growth are rising; the latest developments in the service segment indicate that Apple is storming with full power to boost its services segment revenues. Until the company introduces the autonomous car, I believe it will be able to grow its services revenues at least to a level that will offset the decline in the iPhone segment. This is a positive short-term indicator for Apple’s stock performance, and as presented in my previous Apple articles, I remain bullish on Apple stock for the long haul.

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