On this week's episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Evan Niu check back in on one of their favorite companies. Apple (AAPL 1.15%) Music tends to keep its subscriber numbers close to the vest, but this most recent announcement ranks it as the world's third-biggest music streaming platform.
On a less exciting note, chief design officer Jony Ive is leaving Apple to start his own design company. Find out what Ive's departure might and might not mean for Apple, how Apple Music still has room to grow, what the iTunes split will mean for consumers, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 28, 2019.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, June 28, and we are all things Apple today. I'm your host, Dylan Lewis. I've got Fool.com's Evan Niu on Skype. Evan, what's up?
Evan Niu: Not a lot. My wife actually started a new job this week. That's exciting!
Lewis: So you're adjusting to the new routine, making sure that everyone's where they're supposed to be and the kids are taken care of?
Niu: Yeah. Sending them off to camp, and she's now back at the office. Things are getting normal again for me, my daily workflow.
Lewis: You know what I'm excited about today, Evan?
Niu: What's that?
Lewis: The U.S. Women's National Team is playing at 3 p.m. against France. I've been watching a lot of these games; this might be the game of the Women's World Cup. It's a pretty big one.
Niu: You know me -- I don't follow any sports. I'll have to pass on that one.
Lewis: You'll be rooting for Team USA, I know, in your heart. I will be probably watching it at a bar. I might try to cut out of work a little bit early. Sadly, this will go up just about when the game goes off. The long-standing value of this conversation will be fairly short.
[The] news cycle has been pretty active for one company in particular, one that we really like, Evan. This is Apple. We're going to cover a lot of different stories about this company today. Why don't we kick things off with a discussion of Apple Music? We got a little update on some of their subscriber numbers this week.
Niu: That's right. This week, services chief Eddy Cue disclosed that Apple Music hit 60 million paid subscribers. Apple doesn't disclose their Music subscription numbers on a regular basis. They don't include it on quarterly earnings necessarily. They just announce when they hit these certain milestones. The last update was 50 million back at the end of January, when they announced earnings. We're talking about 10 million subscribers in about five months.
Apple Music is getting a lot of big changes to this year with iOS 13 and Mac OS Catalina. We're talking about some interface improvements. They're adding some stuff like time-sync lyrics.
A big one is also: They're unbundling iTunes, finally, on the Mac and splitting it into three different apps, to better focus the experience on these specific content categories. It's going to become Apple Music, and then Podcasts, and then Apple TV. iTunes has been around for like 20 years; it's been getting bloated and bloated over that time. Software chief Craig Federighi actually even joked about this earlier this month at the developer conference, saying they're going to add a calendar to iTunes, add a dock to iTunes. He was just joking around, but the point is, it's about time to split these things up. Combining Apple Music with iTunes has always been a confusing mess. Your subscription catalog is right next to all the stuff you might have bought for years back. It's never made a lot of sense, so it's actually a good thing that they're splitting it up. That'll probably help them grow more in the future going forward, too.
Lewis: I remember when they first launched Apple Music. They were running into issues where there was double-counting in people's libraries, or things that they had bought had disappeared because they were now on the subscription model where they were streaming stuff. Anyone that had a very delicately curated iTunes account might not have been so happy being an early adopter of Apple Music. They worked a lot of those kinks out. But I think this is something that people should generally be happy about from a user-experience perspective.
The big-ticket thing here, though, is that subscriber number. I think it's pretty clear at this point, Apple Music is far and away one of the big wins for them on the service side.
Niu: Right. He also confirmed that Apple Music is their largest first-party service, which isn't surprising. They've been launching all these different services over the years, most recently, [Apple] News+. And they're about to launch Apple Arcade, which is a gaming subscription business, and then [Apple] TV+ later this year for some video content. They've also been building up this iCloud storage business, too, which they've said has grown quite a bit. They've never given hard numbers around it. He did confirm that Apple Music is the biggest.
Just to put some of these numbers into perspective, at 60 million, Apple is the No. 2 in terms of paid music streaming. Spotify is No. 1, and Tencent Music is No. 3. Spotify has like 100 million. Tencent Music has about 28 million. Those top three companies represent roughly 70% of all paid music streaming subscriptions in the world. All three players by far and away carry most of the weight here.
Lewis: Evan, you don't tweet often, but you tweeted earlier, and you had this awesome chart that you put together that breaks down the recording industry, basically, by revenue. We're getting very close to a milestone of these streaming businesses overtaking the majority of the revenue for the music industry, which is pretty incredible. It's been pretty quick.
Niu: Right. Earlier this year, a trade group, International Federation of the Phonographic Industry (IFPI) put out some figures regarding the global music industry. What they found was that at the end of 2018, there [were] a little over 250 million global paid subscriptions. Separately, Goldman Sachs recently estimated that should grow to 1.15 billion by 2030. That's massive upside in terms of where this market is going. But to get to the number that you're referring to, their figures showed that streaming was 47% of industry revenue last year, compared to 2% in 2008. That's a massive change over the course of 10 years. I think it's pretty clear that paid music streaming is the future of this industry and where it's going.
Lewis: This industry has seen a revival because of streaming. We were seeing declining revenue in the industry for an extended period of time, as people weren't buying physical versions of any content, and they weren't necessarily even paying for content via iTunes because it was so easy to get music illegally. I think streaming has helped curb that because the user experience is good.
Niu: Right. I think people are starting to appreciate the value proposition of, yeah, paying the subscription fee, but now you get access to tens of millions of songs, versus just going out and buying a couple of albums at a time, even though the average consumer now spends about twice as much on music on an annual basis because of the shift to the streaming model. But I think people are finding that it's worth it -- $60 more over the course of a year isn't make-or-break for most people, but now you can listen to basically anything you want, anytime. I think people are appreciating that model. That's where we're going.
Lewis: Yeah. You think about the value prop there. For what would probably be the cost of six to eight physical CDs, you can access any piece of music, anywhere, basically, for an entire year. That's pretty awesome!
Niu: Plus, it's on all your devices. It's not like you have to have your CD with you, carry it around, plug it in your car dashboard or something. You can access the services from anywhere, anything. Smart speakers, phones, tablets, computers, cars. It's everywhere! I think that's also really reinforced the value proposition.
Lewis: Plus, you have less things collecting dust in your house. All those old CD towers, what are you going to do with them? Not going to happen with your streaming music, Evan.
Niu: Turn them into coasters.
Lewis: [laughs] I'm sure there's some hipster coffee shop where that is happening right now, Evan.
Another major news item for Apple is, they went out and scooped up another company.
Niu: They bought a self-driving car start-up, Drive.ai. They've actually been rumored a few weeks ago to have been in talks with this company. Drive.ai has been around for a few years. They raised almost $80 million in funding in the private markets; they're valued at around $200 million. But there have been reports recently that they've been really on the ropes and struggling to survive. In fact, they were set to completely shut down, literally today, and lay off 90 people, according to a WARN notice that they had to file with the state of California, because California requires notices for mass layoffs. And Apple scoops in for the rescue. No one's reported or rumored any prices or how much they paid, but certainly not going to be anywhere near that $200 million valuation that they got a while back. If they were about to shut down, in that bad shape, I'm sure Apple got a pretty good deal on some of the talent they're going to be picking up.
Lewis: Yeah, does this feel like an acqui-hire type of situation for you, where they're more interested in the people and the staff than some of the technology that they're working on?
Niu: That's definitely going to be a big part of it. It was started by a bunch of Stanford graduates. Apple has deep ties with Stanford; Stanford is known for being this pipeline of strong talent. But of course, they've certainly developed some technology.
I think it's a little weird, there's been so much turmoil lately in Project Titan, which was Apple's self-driving car project. They laid off a bunch of people a couple of months ago, like 200 people back in January. And I think there have been some leadership changes, because Doug Field, who used to be an Apple executive, had gone to Tesla for a few years. He left Tesla and came back, and now he's in charge. He's making some changes. So, there's some restructuring going on. But, just, no one's ever known exactly what they're doing.
I think it's also worth noting that in terms of technology, they've been working on this autonomous-driving technology for a long time, but a lot of it also ties in very heavily with computer vision, for these cars to be able to see things and recognize things in real time, and be able to process it. Computer vision, Apple uses across all sorts of stuff -- photo recognition, and augmented reality is going to be a big one going forward. So, a lot of this technology is all tied together.
Lewis: Yeah. I think the application for them is a little different than some of the other self-driving car companies out there. Some of the other efforts, maybe from a Tesla, even maybe GM Cruise or something like that, may be a little bit more pure-play focused on the self-driving tech. It seems like, just because of the vast hardware empire that Apple has, any lessons -- visual recognition, machine learning types of things -- all those things that go into that stuff with self-driving would be applicable to all these other devices that they have out there.
Niu: Right. We know they're doing something because people spot these Apple prototype cars out there with these lidar sensors. There's also reports that they're building these gigantic test facilities. They're definitely doing something. No one's ever known what it is or what it'll look like. We're not going to find out anytime soon.
Lewis: This acquisition will reignite our interest, though. I think we'd felt like this project was on ice for a little while. Now we can start speculating again.
Niu: Yeah, they're definitely still pushing ahead.
Lewis: There has been one constant over the last 2 1/2 decades or so at Apple, when it comes to the look and feel of products and the people calling the shots. One constant has been Jony Ive. This is a name that a lot of people recognize. He's probably one of the few product designers [who] people actually know. He has been a staple at Apple for a long time. He is now leaving the company.
Niu: Right. Apple dropped this massive bombshell last night that chief design officer, Jony Ive -- who I think a lot of people consider one of the most, if not the most famous designer in the world -- he's leaving, and he's going to start an independent design company, but will retain Apple as one of its "primary clients." So, he's still going to collaborate with Apple's in-house design team that he had helped assemble over all these years. But he's starting to move out, get out the door. You really can't overstate his impact on Apple's product design over the past couple of decades, like you mentioned.
Also, not just Apple, but across all consumer electronics. So many of Apple's rivals blatantly rip off his designs, and they don't even try to hide anymore. It's a fact of life now. All these other products rip off Apple shamelessly.
Lewis: You mentioned the amount of time he's been at the company, but I think it's worth emphasizing some of the different products that he's either worked on or spearheaded the development and design of. Going back all the way to the translucent iMac -- now they call it the iMac G3. It was the rounded plastic box with some bright color in there that came out in the late 90s, and was different than every single other computer out there that was boxy. It was fun, it was playful. I remember, my dad had one when I was a kid, and I was just marveling at it. That was one of the first things that he worked on, and got him on the scene at Apple.
Niu: That computer also paved the way for their whole comeback and turnaround starting in the late 90s. Yeah, that computer was hugely influential.
Lewis: And then we have the iPod, which I think was his real first breakout product. This is where I think we start to see a lot of the classic Jony Ive design stuff coming into play. You have everything superminimalist: all-white design, white earbuds. The thing that I think really separated this product, too, was the packaging. We are used to this very intentional packaging from Apple now, where it's almost a treat to open a new product from them in a way that isn't the case for almost any other consumer electronics company. A lot of that started with the iPod line.
Niu: Yeah, they have a whole team of literally cardboard box designers. They go through prototypes. [laughs] They care a lot about packaging, which no one else cares about.
Lewis: I think those two products alone would be enough for a lot of people to be able to hang their hat on. But then you also have the iPhone, of course -- perhaps the most successful consumer electronics device of all time. More minimalism, more round edges from their design team. You have the iPad, you have the Apple Watch. He also contributed to some of their software design efforts. And, of course, he also helped design their campus. It's incredible what a mark he has made on Apple, but also the consumer electronics space in general.
Niu: Right. He was widely known to have this deep bond with Steve Jobs. That bond is also part of why, when Steve Jobs died back in 2011, it of course was a big deal, people were worried about it, but they weren't worried about Apple's product design, because they knew that Ive was still there, taking charge on the product front, particularly because Tim Cook's self-admittedly not a product guy. So, having Ive there helped help investors with that transition when Jobs died and Tim Cook took over.
Lewis: Is this something that we should have been as surprised by, Evan, as maybe we were?
Niu: I think it is still surprising. It's massive news. But at the same time, there have been clues over the past few years that he's been eyeing the exit. For example, back in 2015, when he became chief design officer, he reportedly stepped back from day-to-day management of the team, taking more of a hands-off role.
This was around the same time, as you mentioned with regards to their campus -- Apple started to design their new campus, Apple Park. He was focused very heavily on that project. He was working with this third-party architectural firm that they hired, putting all of his characteristic attention to detail over every little aspect. I've been to Apple Park a couple of times. I was there last year. Even the parking humps have rounded corners. They're so obsessed with rounded corners, they even put them on the parking humps!
Lewis: They can't help themselves! Once you see an aesthetic, you can't unsee it, and you want it to be everywhere. I think it's very easy to look at this departure -- it's a sort of departure; he will be consulting, and his firm will be working with Apple -- and worry a little bit about the product pipeline for Apple. So much of the narrative about this company over the last couple of years has been iterative innovation. It hasn't been anything that's been a step change from where they have been; we've seen continuations of these product lines. Except for the Apple Watch -- that's been the only thing they've launched that's new. What do you make of all that?
Niu: They definitely have been stretching out these design cycles even more. They've always been able to get a lot of mileage out of each new design. But they used to maybe keep a design in place for two or three years. Now they're pushing it. For example, the current iMac has been the same design for seven years. That's a crazy long time. They obviously still sell well, but...
I think he's been also expanding his interest beyond designing computers and gadgets. He's been doing a lot of these other projects for charities and other things like that: rings; he designed an old-school Leica camera, a desk, even a Christmas tree, for some reason. So it seems like he wants to do other stuff now, which might be where this is coming from. With Apple Park, that was also a big thing that has nothing to do with product. Yeah, again, I think it's just more signs that he's maybe just tired of doing the same stuff.
Lewis: Do we know exactly what the new relationship's going to look like? I know you've done a little bit more digging on this than I have.
Niu: Not exactly. That's why it's a little confusing. It's not a traditional exit. It's not like he's just leaving. And this whole thing of, he'll still be consulting or have Apple as a client, there's some skepticism, because people think that maybe this is some PR spin trying to minimize the impact. Of course, a lot of investors and customers are worried about what's going to happen going forward. But their design pipeline is pretty long. They plan things four to five years out. It's still possible that all the products we'll see over the next few years will still have his influence on them. But it's still a little early to call. We don't know exactly what that relationship is going to look like.
At the same time, it's also worth noting that they've had some pretty high-profile design flaws in recent years. That trash-can black Mac Pro that they're phasing out now had a lot of thermal constraints that inhibited its expandability and performance, which makes it a terrible machine for professional users. But then, of course, we can't forget this infamous butterfly keyboard that people are still dealing with. Those have been around for a few years now, and Apple has not fixed them. They keep trying to fix them. It's pretty obvious there's a design flaw there. We don't know what they'll do to resolve that, finally, once and for all. That's been an overhang, too. There's no doubt about it, though: This is a huge loss.
Lewis: Yeah, the obsession with form can occasionally get in the way of function with Apple. Those are two high-profile examples of that happening. I mentioned the concerns that people have about the product pipeline, and what's that next killer product going to be? But we also talked about how they're expanding out software and making it such a big part of the business now. Do they need that next killer product in maybe the way that they did 10 years ago?
Niu: They're large at this point. They do need to always keep on innovating to put out new things. The iPhone business is in decline. Services is ramping up, but still so tiny compared to the rest of these businesses. They do need other things to carry the weight around here. Who knows what it'll be?
Lewis: I've seen some speculation that they are working on some augmented reality headset or eyewear type of things. Evan, if they put something like that out, would you be a buyer?
Niu: I would be interested in it, I have to admit. Of course, it all depends; particularly for something like eyewear, it's very subjective, with the aesthetics of it. If he's come up with some design that's in their pipeline, I'm really curious what it looks like, if it has universal appeal, like Apple Watch. Same thing, it's so personal. But Apple Watch is a hit, even though it's pretty much the same design.
Lewis: Austin Morgan, our man behind the glass, would you be a buyer of augmented reality headgear of some sort from Apple?
Austin Morgan: I don't know. I'm not a big glasses guy. It would have to do something really, really cool for me to buy into it. I am a big Apple guy. I've got all things Apple.
Lewis: You're in the ecosystem.
Morgan: Oh, yeah, big time!
Lewis: I think that whole category has really suffered because of the stigma of Google Glass. I feel like that's such a hard hurdle that anything augmented reality is going to have to get over.
Niu: That's its legacy!
Lewis: Austin Morgan is shaking his head "yes." I think we can wrap there, Evan. Thanks for hopping on today's show!
Niu: Thanks for having me!
Lewis: All right, listeners. That does it for this episode of Industry Focus! If you have any questions or you want to reach out and say hey, shoot us an email at [email protected], or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes, or you can catch the videos from the podcast on YouTube.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today! Let's go, U.S. Women's National team! Get that win, advance to round four. For Evan Niu, I'm Dylan Lewis. Thanks for listening, and Fool on!
