When Apple Inc. (NASDAQ:AAPL) got into the streaming music business, the $9.99 monthly subscription for Apple Music was competitive. However, there’s a shark in the water in the form of Amazon.com, Inc. (NASDAQ:AMZN) and its new Amazon Music Unlimited. A report says AAPL is worried enough to be considering a price cut to $7.99.
Citing two sources who have worked closely with Apple Music, Digital Music News is reporting that AAPL is considering a price drop to Apple Music in time for the holidays. The proposed cut is 20%, which would drop a monthly membership from $9.99 to $7.99, while a family membership would drop to $12.99 from the current $14.99 monthly.
The sources say the $4.99 student rate would remain as-is, and those who have pre-paid for an annual membership would not have the discount applied to their balance.
Apple Music Is a Success
There were doubters when Apple Music launched last summer. After all, incumbents like Spotify — in operation since 2008 — had millions of loyal subscribers.
But the drop off after Apple Music’s initial three-month free trial period never happened and Apple has continued to add paid subscribers at a healthy pace. In September, that number hit 17 million, with 2 million of those joining during the summer. In its recent earnings call, AAPL said Apple Music revenue was up 22% for the quarter compared to last year, contributing to the $6.3 billion the company’s Services division brought in.
In other words, Apple Music has been a success. It has chalked up continuous growth against established music streaming services, achieving a higher profile than Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Play Music.
But then Amazon decided to play spoiler.
Amazon Music Unlimited
While AAPL may position any Apple Music price cut as a holiday promotion, the real reason is Amazon.
In October, Amazon launched its Amazon Music Unlimited streaming music service. While it stuck to the $9.99 monthly fee that has become an industry standard, there are serious discounts available for its customers. Amazon Prime members (and there were 63 million of those back in July) get a $7.99 monthly rate. Buy an Amazon Echo connected speaker and you can play Amazon Music Unlimited streaming music on that device for just $3.99 monthly.
While it’s too early yet for subscriber numbers, Amazon’s entry into the already crowded subscription streaming music business is not good news for Apple.
When Apple Music first launched, one of its key advantages over rivals was touted as being the huge number of credit-card-backed accounts already set up in iTunes. Those existing accounts make it much easier to convert a trial user into a paying Apple Music Subscriber.
With Spotify, for example, the customer needs to set up a billing account and enter credit card details — and at any point during the process may back out.
Well, guess what? Amazon also has millions of credit card-linked accounts on file.
Amazon’s willingness to slash prices and discount its services in a volume over margin strategy to win market share in the long run is undoubtedly spooking AAPL as well.
Bottom Line for AAPL
Apple is unlikely to win any concessions from artists or music publishers. So if it decides to go ahead and discount Apple Music subscription rates to match the deal Amazon Music Unlimited offers to Prime members, it’s going to eat the cost. However, conventional logic says it’s easier to retain your existing customers than to acquire new ones.
And when it comes to growing your customer base, it’s easier to target net new customers than to convince then to switch from a rival.
Cutting Apple Music prices may hurt in the short term. But it would help to prevent existing subscribers from jumping ship. And it would definitely be less expensive than the prospect of trying to convert Amazon Music Unlimited subscribers.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.