With the release of Apple (NASDAQ:AAPL) Music, Apple is officially in the music streaming business. After acquiring Beats Electronics last year, and seeing digital download sales in its iTunes store decline, it was high time Apple took the plunge.
Many believe Apple took too long to enter the music streaming market. Spotify already has more than 75 million active users and 20 million paying subscribers. IFPI reports that, at the end of 2014, more than 140 million people actively used at least one on-demand streaming service, with 41 million paying for a subscription.
But there are a few key metrics that show that Apple isn't too late to the market.
On-demand streaming isn't just growing, it's accelerating
During the first six months of 2015, the number of on-demand song streams increased 92.4% in the United States year over year. That's a significant acceleration from the 42% growth the industry experienced in the same period last year.
What's most interesting is that growth came during a period when there were only a couple of notable developments in the industry. YouTube launched a beta for its premium Music Key service, and Jay-Z helped launch Tidal. Neither has had a significant impact, however, with Music Key still in beta, and Tidal only attracting a handful of subscribers.
With the introduction of Apple Music with iOS 8.4, Apple already has its streaming music service in front of approximately 200 million iPhone and iPad users around the world just a few days after its launch. That makes Apple well positioned to capture a significant share of the future growth in the market, which is still accelerating.
If the market stays at its current growth rate, listeners will stream an additional 45 million songs on demand in the second half of the year compared to the first half. If it continues accelerating, it could be closer to 60 million more streams.
And that's just in the United States. Reports from across the pond show similar acceleration.
Paid subscription growth is accelerating, too
IFPI estimates growth in paid subscription revenue accelerated to 38.6% growth in 2014 compared to a 16.6% increase in 2013. That's important for Apple because it's mostly a premium streaming service with an international digital radio station attached. The growth in subscription revenue is just now catching up to growth in revenue from ad-supported streaming. That means that streaming services are successfully converting more free users to paid users.
That's evident in Spotify's recent numbers, which show the company finally overcame the 25% conversion rate plateau it had been experiencing. That number is now up to about 27% after it's most recent update on listener growth.
More importantly, paid subscriptions generate more revenue compared to ad-supported services, despite being less popular. Last year, subscriptions generated approximately $1.6 billion in revenue, while freemium services generated just $641 million. Apple stands to generate more revenue with fewer subscribers by going premium-only.
Closing the gap
Even with the acceleration in subscriptions during 2014, there's still a huge gap between paid subscribers and ad-supported listeners. And while there will always be a gap between those two tiers, that gap is getting narrower. Already, there are about 100 million free listeners with prime potential to convert into paid listeners.
The release of Apple Music and its integration with the operating system of potentially 500 million-plus iOS devices could convert even more free listeners to paid subscribers. With the acceleration in listeners streaming music versus buying it, Apple is definitely not too late to the game with Apple Music.
Considering that the entire industry generated just more than $2 billion in revenue last year, the new music streaming service won't generate a significant amount of revenue for a company that's expected to bring in $232.5 billion this year. However, Apple Music could encourage listeners to buy more Macs and iOS devices to get the best listening experience possible. And that's where Apple really makes money.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.