Subscription music service expected to boost iPhone experience, but not Apple's profits

Posted:
in AAPL Investors edited June 2015
Apple is expected to announce a new subscription streaming music service at WWDC next week, but investment bank Piper Jaffray expects that the pay-to-play Spotify competitor will bolster the iPhone ecosystem much more than it will pad Apple's bottom line.

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Analyst Gene Munster of Piper Jaffray issued a note to investors this week, a copy of which was provided to AppleInsider, in which he said he expects a $10-per-month music subscription service from Apple will not benefit the company financially in any meaningful way.

For example, he said if Apple were to match the 15 million subscribers currently held by Spotify -- an achievement he said is "highly unlikely" -- it would add less than 1 percent of the company's revenue in 2016.
At $10 per month, if Apple were to gain 15 million subscribers for a subscription music service, Piper Jaffray estimates it would account for less than 1% of its 2016 revenue.
In fact, Munster doesn't think that any of Apple's services will truly move the needle, including the existing Apple Pay, or the anticipated subscription TV service. But that doesn't mean those services aren't a key part of the Apple ecosystem and experience.

"Given Apple's large revenue base from hardware, it will be difficult for these services to add meaningfully to the model as demonstrated above," Munster wrote. "However, we believe that the continued build-out of these offerings adds incremental ways for Apple to keep customers on the iOS platform and continued hardware loyalty does matter for the model."

Apple is widely expected to announce a $10-per-month streaming music service to compete with the likes of Spotify next week, at its annual Worldwide Developers Conference, which kicks off with a keynote presentation Monday at 10 a.m. Pacific, 1 p.m. Eastern. The latest rumors suggest that the service will not outright replace Beats Music at first, and the two will operate concurrently for a time while Apple works out the kinks on the launch of its new product.

For years, Apple's iTunes Store has dominated the digital music market with traditional sales on a per-song and per-album basis. But in recent years, consumers have flocked to streaming music services tied to monthly subscription fees.

The overall iTunes business, however, remains a small part of Apple's financial success, which has been largely driven by the success of the iPhone, and to a lesser extent, the Mac and iPad.

Piper Jaffray has maintained its "overweight" rating on shares of AAPL with a price target of $162.

Comments

  • Reply 1 of 10
    It makes sense. All the other services of Apple serves the same purpose. OSX is free, iWork suite is free, 5gb of iCloud is free or not expensive with other data plans. All these services are building the ecosystem, Individually these services are not contributing to the profit. The new member of the ecosystem will be the Music streaming service.
  • Reply 2 of 10
    jason98jason98 Posts: 755member
    Quote:

    Originally Posted by sog35 View Post

     

    People were saying the same thing about the App Store.  Idiots.


     

    Idiots are those who going to ship $120 annually for "nothing".

  • Reply 3 of 10
    tokyojimutokyojimu Posts: 370member
    Meanwhile, iTunes Radio still doesn't work right, often hanging after it plays a commercial.
  • Reply 4 of 10
    jungmarkjungmark Posts: 6,548member
    [off record]. "You know what will frakking move the needle? An Apple TV Set!" gasped an exasperated Munster as he was led away wearing a straight jacket.
  • Reply 5 of 10
    schlackschlack Posts: 673member
    Quote:

    Originally Posted by jason98 View Post

     

     

    Idiots are those who going to ship $120 annually for "nothing".


    I don't understand what you mean, "for nothing".

     

    I used to pay $10/month for Spotify and it was amazing value. I now pay $100/yr for Beats Music and it's amazing value.

     

    If you are referring to ephemeral nature of a service, then I assume you feel like cable TV, movie theaters, restaurants, car leases, and virtually anything that doesn't persist past the month of payment provides "nothing"?

  • Reply 6 of 10
    15 million? LOL. Every iOS user should buy into this and stop wasting time on spotify. They are already paying AAPL 30% when they subscribe to spotify, so why not just skip the middleman and buy straight from AAPL? They will provide the best user experience b/c of vertical integration with the operating system and hardware. Spotify had a good thing going, but the free tier is bad for the bottom line and people shouldn't be used to getting things for free in the AAPL ecosystem. I hope AAPL knows this and the rumours of not offering a free-tier are true. Free is for Android users, they never pay for anything; if they did they'd pay money for a proper phone. That is why their ASP is so low. iOS users will pay a premium for these services, as they should, as AAPL provides the best product.
  • Reply 7 of 10
    isteelersisteelers Posts: 738member
    jungmark wrote: »
    [off record]. "You know what will frakking move the needle? An Apple TV Set!" gasped an exasperated Munster as he was led away wearing a straight jacket.

    He will cling to that with his dying breath. Why would a paid subscription service make people cling to the platform? Apple plans on making a profit with this or they would not do it. If it was free I could see him saying it was to keep people in the ecosystem, but if it is a paid service, I don't get his reasoning.
  • Reply 8 of 10

    15 million?  please.  plus that's only per month.  AAPL will kill this; they'll get way more than 15 million people to subscribe.

     

    And they should kill spotify.  You are already contributing 30% of your subscription if you do subscribe, so why not just skip the middle man and go for the superior AAPL integrated experience that Beats Music Subscription will undoubtedly provide.

     

    But more importantly, they need to kill Spotify because AAPL users shouldn't be used to getting stuff for free.  Ads are for Android and poor people;  AAPL is for people who can afford to pay for a good phone and good service.  If you want to be part of the AAPL ecosystem you need to be able to afford it (that includes subscriptions to iCloud, and their new music service).  

     

    I am confident true Apple fans will see the value of the subscription model, including shlack who is already signed up for Beat Music because it is owned by Apple, and it will undoubtedly get better.

     

    Don't be fooled by free.  You get what you pay for.  If you're not willing to spend for quality service why are you in the Apple ecyosystem anyways?  You're not getting the true experience if you just buy the phone and don't buy in to the apps and services.

     

    I think people know this and 15 million is conservative to say the least.

  • Reply 9 of 10
    eriamjheriamjh Posts: 1,076member

    Apple needs to boost its ecosystem to continue its domination.   Nothing wrong with more services to enrich the experience, free or otherwise.

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