Apple Inc.’s (AAPL) streaming music service is doing better than many expected, and that’s bad news for the competition. Spotify in particular is clearly taking the Apple Music threat seriously.
The company is currently running a promotion offering a free Chromecast — the popular video and music streamer from Alphabet Inc’s (GOOG, GOOGL) Google — in return for signing up for three months of Spotify Premium.
The Google Chromecast goes for $35 and Spotify Premium costs $9.99 per month, so anyone who signs up for the deal is coming out ahead — Spotify, not so much. But then again, it has always struggled to make money despite being one of the leading streaming music services since its arrival in 2008.
As reported last year in The New York Times, Spotify lost nearly $200 million on revenue of $1.3 billion in 2014 (2015 figures have not yet been made public). That follows a consistent pattern of yearly losses.
Competition in the streaming music world is intense, and since Apple Music launched, there have been some high-profile casualties. Rdio folded in late 2015, and its assets were snapped up by Pandora Media Inc (P), which is in turn reportedly exploring the possibility of selling itself.
Can Spotify Keep Up?
Profitability aside, Spotify was on a roll early last year, boosting its active users to 75 million in June, bringing it within striking distance of Pandora — which is more of a streaming radio service (subscriber’s can’t pick their own songs) — and cementing its position as number one in on-demand streaming music.
However, the vast majority of Spotify users listen to a free, ad-supported version. The $9.99 per month Spotify Premium subscription service generated 91% of the company’s revenue in 2014, and of its current 75 million active users, only 20 million pay for Spotify Premium.
That’s where Apple Music is proving a serious threat. Apple counted 10 million paid subscribers in January. Not only is this half the total subscribers of Spotify, where Spotify Premium took more than five years to hit the 10 million mark, Apple Music hit the milestone in just six months. Earlier this month, Apple SVP Eddy Cue said Apple Music had passed 11 million paid subscribers.
So Apple Music is not only gaining on Spotify in terms of paid subscribers, it’s snapping up those subscribers at a pace few had predicted. At this rate it is on pace to potentially eclipse Spotify Premium as the top paid on-demand streaming music service by the end of this year.
Slipping out of No. 1 has repercussions beyond bragging rights. If Apple Music gets to a dominant position in streaming music, it’s in a better position to use its leverage for artist exclusives and favorable royalty rates. There’s also the worry that as number one, more people will naturally gravitate to Apple Music; some could even jump ship from Spotify. Losing subscribers — especially paying subscribers — would make it more difficult for Spotify to raise money. Eventually, it could find itself in the position of Pandora, or even worse, Rdio.
Making the situation particularly challenging for Spotify is the fact that Apple Music is front and center on over 1 billion Apple devices in active use (instead of requiring a potential subscriber to actively download the app), and it benefits from a halo effect from Apple’s Beats audio gear, which has the marketing might of Apple behind it.
There is plenty of room for multiple streaming music services. However, there are only so many people who will actually pay for a subscription, and that’s the key to profitability. Apple may not care much if Apple Music actually turns a profit, but Spotify can only sustain so many years of loses before its time runs out. And that day of reckoning will come sooner rather than later if Apple Music passes Spotify Premium in paid subscribers — it’s a lot harder to find investors willing to commit money when you’re not only unprofitable, but you’re also No. 2 and sinking.
The free Google Chromecast won’t make a big difference in the long run, but if Spotify can use a giveaway to convert some of those free listeners into Premium subscribers, it buys the company time to come up with a strategy to combat Apple Music.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
