Apple (AAPL) is expected to announce a streaming music service at its developers’ conference next week. With digital downloads declining as audiophiles switch to services like Spotify, the way we consume music is changing once again, so an Apple streaming music service makes sense.
But the new premium service, which will cost $10 a month and allow for unlimited streaming, is a drop in the bucket for the AAPL stock price.
In fact, it’s not even clear that the Apple streaming music service will boost revenues, as the new subscription model will undoubtedly cannibalize iTunes digital downloads.
Apple Streaming Music: Too Little, Too Late
It’s unlike AAPL to get a late start on an emerging trend — Apple’s better known for creating the trend itself. But Apple is, without question, late to the party. And Apple’s streaming music service will face heavy competition from the current dominant market leader: Spotify.
Spotify has a seven-year lead on AAPL in the streaming market, first gaining popularity as a Facebook (FB) connected music player. Since 2011, Spotify has grown its monthly active users from 10 million to about 60 million, and reported revenues of $1 billion last year.
So how can AAPL catch up to Spotify? Thankfully, Apple has unparalleled access to music-loving customers — the hundreds of millions of iTunes users, the majority whom already have credit cards on file. Here’s the difficult math behind Apple’s streaming music segment:
A Daunting Task
According to the Wall Street Journal, AAPL will likely try to sell the new Apple streaming music service by badgering existing iTunes customers, perhaps prompting them to sign up for the $10/month service the next time they buy music. The WSJ highlights the current economics of iTunes music downloads:
“Of the 110 million people who bought music on the iTunes Store last year, the average customer spent a little more than $30 over a 12-month period.”
Okay, so $3.3 billion from iTunes music sales. In order to achieve $3.3 billion in revenue from its streaming service, Apple needs to convince 27.5 million people, or 25% of iTunes customers, to pay $120 a year.
What sort of customer who, on average, spends $30 a year on music, would be willing to quadruple what they pay for a new service? It’s a trick question. Those most likely to pony up for the service won’t be average users, but rather iTunes power users — those with the discretionary income and musical appetite to buy a ton of digital downloads in the first place.
That’s where AAPL ends up cannibalizing itself most severely. I expect digital downloads — which fell 8% last year industry-wide — to plunge even more rapidly this year.
Bottom Line on Apple Streaming Music Service
With all that being said, there is a chance Apple could boost its music revenues with this move. It has enough credit cards on file to make this feasible, and rumor has it that Apple will also offer a free, ad-supported streaming service taking aim at the likes of Pandora (P) and Sirius XM (SIRI).
But in the grand scheme of things, and much like the Apple Watch, Apple’s streaming music service simply won’t move the needle for AAPL stock, which relies almost explicitly on the iPhone as the lifeblood of its business.
Even Carl Icahn, an unapologetic AAPL bull with a price target of $240 for the stock, doesn’t see iTunes as being a big contributor going forward. Last year, the “iTunes, Software, and Services” segment generated $18 billion of Apple’s $182 billion in revenues, or 9.9%.
What percentage of revenue does Icahn see coming from that category in fiscal years 2015, 2016, and 2017? 8.8%, 7.7%, and 7.1%, respectively.
Don’t get too excited.
As of this writing John Divine is long shares of AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
