Failure, or Opportunity? Just 3% of Apple Users Are Subscribed to Apple Music

Failure, or Opportunity? Just 3% of Apple Users Subscribe to Apple Music

Matteo Artizzu (CC by 2.0)

Is that a failure, or an opportunity?  Maybe Apple Music is barely getting started.

In a note to investors, RBC Capital Markets’ Amit Daryanani wrote that Apple would have to grow revenues from its services division by 18% over the next four years.  While the numbers may sound high, Apple’s services division has grown 21% annually over the last five years. Daryanani’s prediction comes from Apple Service revenue over the past several years.

Image by RBC Capital Markets

However, Apple Music and iTunes have maintained a low gross margin at 15%.

Image by RBC Capital Markets

According to Daryanani, App Stores, iTunes, Apple Music, AppleCare, and the Apple Update Program have largely contributed to the division.  The Cupertino-based company has earned strong revenue in the services division thanks to strong consumer loyalty and “synergetic benefits.”

Image by RBC Capital Markets

Daryanani’s growth numbers may face a significant impact from the “super cycle” between iPhone 7 and 8.  Last June, Credit Suisse correctly calculated a “muted” and “modest” upgrade cycle for the iPhone 7.  Instead, Credit Suissie and analyst Kulbinder Garcha foresaw strong numbers for the 2017 iPhone.  They believe the iPhone 8 will successfully court new users and accelerate upgrades among existing iPhone users.

The rumored “cord-cutting” iTV launch also contributed to Daryanani’s estimates.

The App Store will keep bringing in strong services revenue for the division, per Daryanani’s estimates.  It may bring in 85% of gross margin estimates.  Apple Pay has proven a success among consumers, as the service may hit at 80%.  Yet, digital downloads numbers keep falling, as the service may only bring in 25%.

However, since Apple released its music streaming service, Apple Music, it has only reached a 3% install base.  97% of core Apple users have yet to purchase a paid subscription since its launch two years ago.

Image by RBC Capital Markets

Instead of considering Apple Music’s streaming service as a failure, Daryanani called Apple’s service “a very underpenetrated opportunity.”  He also highlighted the dismal numbers as a “very attractive opportunity for user growth.”

RBC Capital Markets increased its Apple stock price target to $155 thanks to successful Apple service performance.  The “super cycle” will also lead the Cupertino-based company to year-over-year revenue growth.

What could harm Apple’s estimates in the long run?  Daryanani listed “execution stumbles,” “greater-than-expected iPod cannibalization,” and “channel conflicts or execution” as theoretical factors.

Daryanani’s estimates led to surging stock prices last week.  However, Daryanani failed to lay out a game plan on how the company will increase overall subscriptions.  Apple Music has yet to capitalize on appealing to its established user base to increase their paid subscription numbers.

Meanwhile, Spotify has recently surpassed 50 million paid subscribers, jumping 20 million in just one year.  Yet, Apple Music only launched two years ago and sports 20 million paid subscribers.  Spotify reached the 50 paid subscribers mark after 10 years.

Numbers aside, the bigger question in investors’ minds is: wow will Apple Music continue establishing a strong presence and get high paid subscription numbers?  Should it worry about first place, or should the service conform to a strong second, behind Spotify?

3 Responses

  1. Avatar
    music stowaway

    Interesting point – I’m one of the 97% and I still prefer to buy music from iTunes on a track by track basis, although I did buy a German electronic music album from the 70s not so long ago.. generally when it comes to pop I buy singles.. For me it’s a better personal economy than renting music month by month.. but who knows about what I’ll be doing in the future..

    My music partner has Apple Music – but I don’t think he actually uses it that much..

    For small vanity labels they probably should have Apple Music just so they can see how their repertoire appears and works in that system

  2. Avatar

    The real opportunity has already passed (it existed before they panicked and went on the record with this Beats-laden disaster). Before Apple Music, the company’s approach was to quietly work a product to perfection behind the scenes and go to market when, and only when, “it just works”. Even though they were way behind, they should’ve just stayed out of streaming until they had it right.