Can Spotify and Facebook Give iTunes a Run for its Money?

Facebook recently unveiled changes among which users can now share music, movies and TV shows with Facebook partners like Spotify, Hulu and Rdio. This will undoubtedly challenge tech giants such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), which also provide online content to users. In our previous note titled Facebook’s Music Platform Plans Should Surface Next Week, we discussed that this is a win-win situation for Facebook and the partners as partners get the advantage of Facebook’s immense reach of 800+ million users while Facebook drives engagement higher encouraging users to spend even more hours of their day on the site.

Here we will look at how this announcement could impact Apple and our $510 price estimate for Apple stock, which is about 25% above market price.

Apple’s position in online music market

As of last year, Apple dominated the U.S. online music market with around 70% market share through its iTunes store, according to research firm NPD. ^[1] There is little to suggest that its market share would have changed much this year from last year as Apple continues to strengthen its position in the online music market.

However, as Facebook gives Spotify and others access to its massive network, these dynamics could quickly change. In addition to Spotify, other companies like Clear Channel iHeartRadio and Pandora pose a threat to Apple’s iTunes over time.

Even though Apple itself has more than 160 million iTunes users, it has failed to make meaningful inroads in social media. ^[2] It launched the music-oriented social network named Ping last year, but the venture failed to take off.

Potential impact to Apple stock value

Although the direct impact to Apple from Facebook’s new music service is minimal as iTunes accounts for only about 2% of our price estimate for Apple stock, the indirect impact could be much larger. What makes the Apple devices such as the iPhone, iPad and iPod attractive is not just the hardware, but also the software and apps ecosystem that comes along with these devices. iTunes is an important component of the ecosystem for which Apple is well known. Hence the impact to Apple could be much bigger if seen from a holistic point of view.

See our complete analysis for Apple stock here

1. Apple controls 70% of U.S. music download biz, Reuters, May 26th, 2010 [↩]
2. iTunes user data provided by Apple in its press release, September 1st, 2010 [↩]