Apple Music Could Add $10B To Apple Inc. (AAPL) Revenue

  • Apple has revealed that Apple Music now has 17M paying subscribers.
  • That's strong growth for the streaming service, a trend that pervaded the music streaming industry.
  • What does this imply for Apple's growth prospects?.

Apple Inc. (NASDAQ:AAPL) recently revealed that Apple Music paying subscribers have already hit the 17M mark, placing the service second only to Spotify with 40M paying subscribers. Apple announced back in February that the service had 11M paying subscribers; 13M in April and 15M in June. So the service has been adding roughly 1M subs every month and is likely to finish the year with more than 20M paying subscribers.

That's impressive growth considering that Beats Music had just 110,000 subs when Apple bought it back in March 2014. Spotify also seems to have hit a growth spurt lately and has managed to double its paid subscriber base over the last 15 months.

Apple Music is part of Apple's burgeoning Services business.

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New growth driver

There is a clear trend where on-demand music streaming is rapidly becoming mainstream and not just something that hipster college kids do. Strong demand for music streaming services has breathed new life into the music business after being ravaged by falling prices and runaway piracy rates. According to a midyear report from the Recording Industry Association of America, retail spending on recorded music in the U.S. grew 8.1% to $3.4 billion during H1 2016. This puts the industry on pace to record its second year of growth, and the first back-to-back growth since the 1998/1999 season.

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The music industry has music streaming services such as Apple Music and Spotify to thank for its renewed growth. According to the report, U.S. streaming revenue grew a robust 57% during the first half of the year to $1.6 billion. That rapid growth has been able to offset industry-wide shrinking purchases of singles and albums. On-demand music service and subscription music now account for a larger piece of the music industry than sales from CD singles and DVDs.

Source: Bloomberg

And that's good news for Apple, whose ambition is to grow Apple Music subscribers to 100M. Currently, only Spotify poses a serious threat to Apple Music getting there quickly because the two services are quite similar on multiple fronts. The biggest difference between the two is that Spotify sports a freemium revenue model whereas Apple Music only offers a 3-month free trial period after which users are required to upgrade to a premium service. Otherwise, there is little to choose between the two: both operate a two-tier system featuring very limited functionality for free and full use for a $9.99 monthly fee, and both platforms boast 30M+ tracks.

The two companies have also been stealing each other's moves: Apple recently introduced a cheaper $4.99/month service for qualified students to match Spotify's similar service while Spotify introduced a $14.99/month rate for family access to match Apple's family access service.

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Spotify though might have a slog trying to compete with Apple Music over the long-term primarily because the company remains deeply in the red thanks to its freemium model. The company raked in $2 billion in revenue last year but finished with a net loss of $200 million, thus extending its long string of losses. We do not have revenue and income figures for Apple Music yet, though some basic math suggests the service is quite likely profitable. The New York Times reported last year that Apple pays 0.2 cents for each song streamed, or $2 for every 1,000 songs streamed. The company also doles about $0.00047 per stream to music publishers. The two payments combined work out to $2.47 per 1,000 streams. Spotify users average 110 listening minutes per day, or roughly 37 tracks per day, and 1,110 per month. Assuming this holds true for Apple Music, it implies that Apple spends roughly $2.74/month per subscriber on Apple Music. About 90% of Apple Music subscribers are paying customers compared to just 40% for Spotify. After factoring in other costs such as R&D, Apple probably spends $3.50-$4.00 per subscriber on Apple Music. That's less than the cheapest $4.99/month student rate.

The math here could be oversimplified, but I believe it's the ballpark figure. Using Spotify's 2015 revenue and subscriber numbers, Apple Music is currently on a $1.8 billion annual revenue run-rate, and could exceed a $2 billion run-rate by the end of the year.

Huge iOs installed base working in Apple Music's favor

Spotify and other streaming incumbents are not the only rivals Apple Music has to contend with since (NASDAQ:AMZN) is reportedly looking to soon launch a $9.99/month streaming service that will be untethered to Prime Music. Apple though has one big thing working in its favor: a huge iOs installed base. Apple Music comes pre-installed on all new iPhone handsets while older handsets can get the service with iOS upgrades. With 700M iPhone handsets in use around the world and more than 1 billion iOS devices, Apple Music has a big headstart over its  rivals that lack such a comprehensive hardware platform.

This in effect also means that Apple Music still has a large addressable market and plenty of room to run. At current growth rates, Apple Music subscribers are likely to hit the 100M milestone in 3 years or perhaps less, which presents a nice $10 billion in incremental revenue for Apple. Apple Music is likely to soon become the key driver for Apple's high-margin services segment.

Brian Wu Brian Wu   on Amigobulls :
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