How Apple Plans to Win the Music Industry

Learn why Apple may be preparing the release of an iTunes app for Android-based devices.

Mar 24, 2014 at 1:30PM

Apple (NASDAQ:AAPL) could be preparing the release of a Spotify-like music subscription service, according to Billboard. The move would help Apple to compete better against services such as Pandora (NYSE:P), which has been blamed for taking away a large share of Apple's iTunes customers. 

Apple's interest in the music-streaming business isn't new. Last year, it released iTunes Radio, the company's first in-house attempt at streaming music. The service, which mainly offers a free ad-supported version, quickly became a serious alternative to Pandora, amassing more than 20 million users in a few weeks. Apple now could be preparing the release of an iTunes app for Android devices, looking to tap into a larger market share. How does Apple plan to win the music industry?

Apple

Source: Apple

The new iTunes Radio
According to Billboard, Apple may have opened exploratory talks with several senior label executives about launching a music-streaming subscription service that resembles Spotify's on-demand business model. The company could also be considering other efforts to support iTunes sales, like offering exclusive digital album-release windows.

In its current version, Apple's iTunes Radio is similar to Pandora, in the sense that users can create their own radio station based on a recommendation system. Unlike Spotify, users cannot play specific tracks on demand.

The new version of Apple's iTunes Radio may allow users to play specific tracks, just like Spotify, in a move aimed at improving iTunes' sales performance. iTunes is still one of the largest music retailers in the world, with users spending an average of roughly $12 per quarter buying music. However, this figure declines year by year. Meanwhile, streaming services such as Spotify -- which may be preparing an IPO -- continue experiencing steady top-line improvement.

Streaming services are booming
According to the Recording Industry Association of America, streaming services generated $1.4 billion in subscription, advertising, and licensing revenue in the U.S. last year, a 39% increase from 2012. The situation is completely different for downloads. According to the International Federation of Phonographic Industry, downloads slipped 2.1% worldwide, while streaming music revenue grew 51%.

Android expansion
Billboard also mentions that Apple may be considering the release of an Android version of its iTunes app. Sooner or later, this kind of move was bound to happen. For years, Apple has insisted in developing its mobile apps exclusively for iPhone devices. However, the company can no longer ignore the fact that Android is by far the world's most popular mobile operating system, with roughly 79% of the mobile market in 2013, according to Strategy Analytics. In this context, any serious attempt to release a mobile music-streaming service needs to consider a version for Android devices. Apple's iTunes Radio isn't an exception.

From now on
The release of iTunes for Android devices, together with a new version of iTunes Radio based on an on-demand model, could be a game changer. Competitors such as Pandora and Spotify have so far been able to deal with iTunes Radio, mainly because Apple's service, which can only be used by iPhone users, had several limitations.

Note that Pandora, which entered 2014 with strong momentum, reported an increase in the total number of active listeners on Jan. 6. That being said, the company is also experiencing a deceleration in user growth. Pandora's year-over-year user growth rate declined from more than 30% in July to 13% in Dec. 2013. This trend could continue if the new version of iTunes Radio succeeds in gaining Android users. 

Final Foolish takeaway
Apple's iTunes is currently the largest music retailer. However, the service has recently experienced a slowdown in sales, driven by the increasing popularity of music-streaming services, like Spotify and Pandora. To improve sales performance, the company may be planning the release of a new version of iTunes Radio, together with coverage for Android devices. This strategy should help Apple to improve its top line by adding Android users. Finally, the release would be a negative for Pandora, which depends heavily on Apple hardware, as 40% of Pandora listeners access the service through an Apple device.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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