Why Apple Music Is Unlikely To Move The Needle For Apple

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At its annual Worldwide Developers Conference (WWDC) this week, Apple (NASDAQ:AAPL) announced its long-awaited streaming music app, Apple Music. The service will compete with streaming music giant Spotify, and Apple is rumored to be targeting 100 million users over the next few years. [1] This is an extremely ambitious goal, considering that Spotify – which was launched in the U.S. nearly four years ago – only has about 20 million paying users (though it also has a free ad-based service, which has an additional 55 million users). [2] The service does look compelling and offers some advantages relative to competitors – for example, it will be automatically installed on all new iDevices, giving it an accessibility advantage for new users. Additionally, users will be able to integrate their iTunes libraries in Apple Music. However, we don’t believe it will be large enough to make much of a difference for Apple from an earnings standpoint. Here’s why:

  • If Apple is able to reach its 100 million subscriber goal – which would be quite a feat – charging subscribers $9.99 per month, Apple Music would be generating about $12 billion in annual revenue.
  • These revenues would likely be lower-margin relative to Apple’s other businesses; Spotify pays about 70% of revenues to music rights holders, and we assume that Apple’s cost structure would be similar. Assuming profit margins of 25% (which is likely optimistic, given that Spotify was unprofitable in 2014) the service would be contributing earnings of about $3 billion.
  • While revenues of $12 billion and earnings of $3 billion are certainly impressive, we expect Apple’s net income to be over $50 billion this year. This means that, in an optimistic upside scenario, Apple Music would be accretive to earnings by less than 6%.
  • We believe a more realistic scenario would see Apple attain a paying subscriber base comparable to that of Spotify, with margins in the 15-20% range. With 20 million subscribers at $9.99 per month and 20% margins, Apple Music would be generating annual revenues of about $2.4 billion and earnings of around $480 million. Under this scenario, Apple Music would be accretive to earnings by less than 1%.
  • Furthermore, we expect that Apple Music would likely cannibalize some of Apple’s iTunes music revenues, as Apple Music subscribers would be less likely to purchase songs from the iTunes store. Therefore, Apple Music’s net earnings impact could be even less than the above estimates.

There are certainly benefits to this move for Apple beyond the financials, as the service will likely improve the company’s ecosystem and help offset falling iTunes sales. On an earnings basis, however, we don’t expect the service to drive significant growth for Apple.

See the links below for more information and analysis:

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Notes:

  1. Rumor claims Apple wants to reach 100 million subscribers for Apple Music, Apple Insider, June 2015 []
  2. Spotify announces a 20 million head start on Apple Music, The Verge, June 2015 []