Earlier this summer, Apple (NASDAQ:AAPL) released its newest platform, Apple Music, to much fanfare -- thanks in part to a public spat with Taylor Swift and a free three-month trial. Apple executive Eddy Cue recently discussed some early numbers on the platform's user base... and they are fairly underwhelming. After a month the service has 11 million users, leaving it well behind the paying user base of established streaming service Spotify. Have user experience issues scared off would-be adopters or did Apple simply wait too long to get a piece of the streaming pie?
A full transcript follows the video.
Sean O'Reilly: Tim Cook is sad you're not using his streaming music service, on this tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly, joined today by the incomparable Dylan Lewis. Today we're doing a follow-up on our show from a month ago ...
Dylan Lewis: Yeah, just about a month ago.
O'Reilly: ... on Apple's new music service, which is designed to compete with YouTube. Spotify, Pandora (NYSE:P); all that good stuff. Dylan, how's it going?
Lewis: It's going all right. One of the prompts for this was, earlier this week Eddy Cue, an Apple executive, had an interview with USA Today in which he mentioned that Apple Music currently has about 11 million subscribers.
O'Reilly: That's it?
O'Reilly: Wow. How many iPhones did they sell last quarter -- 50 million?
Lewis: Yeah. They sold about 4.5 times that in iPhones. Of that 11 million, 2 million are on that family plan. As a refresher, the first three months of Apple Music is a free trial period. Apple is paying out royalties to the artists. This was hotly debated for a while, but the people using the services don't need to be paying for it.
Lewis: The price points right now, for the individual account is $9.99, which is in line with most of the other major streaming services. They also have the family plan, which is $14.99.
O'Reilly: Why aren't people -- are they just set in their ways? What do you think is going on?
Lewis: I think this is largely a product of user experience. It has been panned by some of the major tech outlets.
O'Reilly: It's not functional?
Lewis: Yeah. The Verge said: "Apple Music is messy, slow to load, complicated to set up, and missing some social features. Apple has created a music service that is both overwhelming and sparse at the same time." Not to be outdone, Mashable's Apple Music review was titled "Loud, Fast, and Out of Control."
O'Reilly: I'm scrolling ahead here. What The Loop says is even better. That's gold.
Lewis: Yeah. Their headline: "Apple Music Is a Nightmare, and I'm Done With It."
O'Reilly: Oh my God.
Lewis: The Loop elaborated: "I love Apple. I love them because they take difficult problems and come up with innovative, simple solutions. The things they make just work, and we trust them. Unfortunately, my experience with Apple Music has been exactly the opposite."
O'Reilly: Had you told me this would happen a month ago, I would have said there's no way Apple is capable of making that bad of a user experience. They invented the scroll thing on the iPad; they pushed forward the touchscreen cell phones. This is staggering.
Lewis: Yeah, and this is a firm that specializes in simplifying and streamlining the user experience, making it so your grandmother can use devices that would otherwise be inaccessible to her. It is surprising.
O'Reilly: My grandmother's not on Apple Music.
Lewis: One of the big selling points with Apple Music is that it's an integrative product. If you have an iTunes account, you're not losing that music library and having to rebuild that from scratch like you would if you transitioned over to Spotify. You're able to import that and then build on it with the streaming service.
The problems with that is, the system seems to be very conscious of avoiding duplicates. Normally that's a good thing. You don't want two of the exact same file, but I think what a lot of users are finding is, if you have the studio album and a greatest hits, you're only having one of them showing up.
O'Reilly: Yeah. I love my acoustic version.
Lewis: It's a problem, because people want both. If they have both, they want both. If you're listening through the greatest-hits album you want to be able to listen to all of it. You don't want to have this patchy experience.
O'Reilly: What's up with the "add" button here?
Lewis: There's this "override add" button that they've built in...
O'Reilly: If you have a duplicate?
Lewis: Yeah. I don't know if this is something they patched recently, but in some of the earlier reviews from the first couple weeks, this was something that wasn't working, or it was giving you the pinwheel. Some of the other stuff I've seen, there have been problems with syncing across devices.
O'Reilly: Between your Mac and your iPhone.
Lewis: ... were showing up on your iPhone, but showing up on your iPad as different, and some metadata and album art issues. The people that are audiophiles that have these very tailored playlists -- I'm someone that is absolutely beholden to my play counts. I love having that data to know what I've been listening to and over the last 10 years what my most listened to songs are.
O'Reilly: You really like data way too much. You have a disease.
Lewis: I think so. That's the problem. People are so attached to that, and they've been part of the iTunes platform for so long that it's weird for it to not work the way they're expecting it to, especially because it's coming from the same provider.
O'Reilly: Is there anything good going on with this? What's the "For You"?
Lewis: People do seem absolutely gaga over the "For You" recommendation engine.
O'Reilly: Lady Gaga is in on this?
Lewis: There's a couple big names. I'm just going to let that one go. It's this very discovery-focused, improve-as-you-use-the-service, recommendation service that they're offering. It's like, "You enjoyed Calvin Harris; you'll probably also like this."
O'Reilly: YouTube is pretty darn good with that, though. Are they trying to replicate that, or what?
Lewis: I think it's more along the lines of what you're seeing with Pandora with these very user-specific, taste based stations, or playlists, or recommendations that are highly curated and lend themselves very well to discovering new artists and new things to listen to.
I think one of the other big things that people seem to really enjoy is the "New" section, which is an editorialized page, and less algorithm based. I think they're relying a bit more on their music editors for that.
O'Reilly: And they're just putting the latest Lady Gaga song on there?
Lewis: Yeah. It's kind of the same thing where you have the smashing releases that you expect from the major pop stars, but there are also these tailored things that are a little bit more discovery oriented and giving people something fresh and new.
Lewis: You look at this blend of positives and negatives and you see that 11 million number, and for context, Spotify has 20 million paid subscribers, and roughly 75 million active users.
O'Reilly: And they don't have near the embedded use that our civilization has of iTunes and iPhones.
Lewis: Right. Last count I saw was about 800 million installed iTunes users.
O'Reilly: Good God!
Lewis: So you look at that 11 million number and ...
O'Reilly: Wait, what is that? Hold on.
Lewis: That's a low yield.
O'Reilly: Eleven divided by 800, right?
O'Reilly: Is that where we are -- 1.3%?
Lewis: Yeah. That's not a high conversion base. Granted, it's early, and anytime you roll out a new platform there are going to be some bugs. This might be something that we see switch up a bit in the coming months, but it seems like they have to fix some major issues. When you roll something out you want it to be as seamless of an experience as possible, because that first impression can be really damning.
O'Reilly: This is why you don't use the first version of anything.
Before we move on, I want to make everybody aware of a very special offer for all of Industry Focus listeners. If you found this discussion informative, and you're looking for more Foolish stock ideas, Stock Advisor may be the service for you. It is our flagship newsletter started more than 10 years ago by Motley Fool co-founders Tom and David Gardner.
We're offering the lowest price out there for all of our Industry Focus listeners. It is $129 for a two-year subscription to Stock Advisor. You will get two stock recommendations every month with insight from our team of analysts. Just go to focus.fool.com to take advantage of that deal. Once again, that is focus.fool.com.
Now we're going to talk about how Apple Music's subscriber base stacks up to expectations. Was Apple vocal with what they thought they would see in terms of adoption and everything?
Lewis: No. I think they were pretty mum about it. I didn't see much coming out.
O'Reilly: Meeting internal expectations again?
Lewis: Right. This vague nebulous in terms of expectations.
O'Reilly: "We're pretty happy. It's meeting our expectations." Yeah, right.
Lewis: Thank you, Apple Watch. I think one of the beauties of doing the podcast and checking in on the industry repeatedly is that we get to set out our own expectations and then adjust accordingly.
O'Reilly: But Dylan, what did you say would happen a month ago?
Lewis: Unfortunately, I think I'm going to have to eat my hat a bit on this. The timetable is short, and I'm going to say it's a long game. Maybe these numbers will pan out, but when we talked about Apple Music about a month ago I said iTunes has an installed base of about 800 million users as of 2014. Maybe Apple will convert 5%-10% into Apple Music subscribers.
O'Reilly: It sounds reasonable. It's not crazy.
Lewis: Yeah, especially because it's a company, it's a brand, and a platform that is so reliant on the ecosystem and this experience that people are very entrenched in. It makes sense that it would carry right over.
O'Reilly: Well, I have an iPhone and I updated to the new iOS; then it had the new, fancy music logo. This pretty pink-blue logo.
Lewis: They build everything right in.
O'Reilly: I would have assumed that would have gotten 5% of the people.
Lewis: I think it's definitely disappointing to see they only have 11 million people signed up right now for the free version, especially when you consider that their pre-existing platform on iTunes was huge. Spotify has twice that, and people are paying to use that.
O'Reilly: Is it possible that Apple is just late to the game with this and they should have done this four years ago?
Lewis: Maybe. I think that's a great point. If you're a Spotify user, you're not going to convert over to Apple Music.
O'Reilly: They were the trailblazers with the iPod. I remember when my sister got that in 2001. It was a big thing, but it was so cool. We've got tons of options to listen to music now.
Lewis: I think something we've touched on in the past is, with all the major streaming services anchoring to this $10-a-month option; that kind of commoditizes music a bit. It becomes "who has the best offering," in terms of platform and functionality. If you're running into a bunch of issues with the system, it doesn't really bode well for the long life of your platform.
O'Reilly: What's going on with this IFPI? International Federation of the Phonographic Industry. Thomas Edison started this.
Lewis: You can tell how long you've been around. It's a non-profit, they're based out of Switzerland, and they represent the interest of the recording industry. They have some data that the number of paying subscribers to streaming services in music rose to 41 million in 2014. That was up from 8 million in 2010.
O'Reilly: Paying subscribers. So Apple has a quarter of that already?
Lewis: That is last year's number.
O'Reilly: This is old, and given the growth, who knows?
Lewis: Exactly. That's good for a compound annual growth rate of 50%, which is flying.
O'Reilly: That's red hot. Yeah.
Lewis: If you want to forecast that out for 2015, maybe we hit around 60 million. I think that sounds pretty reasonable, but you can't take that 11 million and say "Apple has a 14% share."
O'Reilly: There's really a bunch of overlay.
Lewis: Also, those 11 million are not paid subscribers. They're using the free trial. Ideally, Apple gets to the point where they transition those folks into paid subscribers, but I have no idea what the yield is going to be.
O'Reilly: We won't really know until September at the earliest.
Lewis: Right. That's really what we have to watch for. I'll say, I was definitely a bit disappointed. Especially because it's a free offering. You'd think people would hop on the trial.
O'Reilly: Yeah. I didn't. I don't know why. I'm really busy. I don't know.
Lewis: I think I had expected to see somewhere around 40 million paid subscribers within a year. I don't know that they're going to be close to being on track for that. If they really right the ship ...
O'Reilly: This is such a tough egg to crack. Jay-Z's start-up isn't doing well, either.
Lewis: Yeah. I definitely think he was guilty of overestimating the pull of Apple and the notion that they would revolutionize the space. I think they're just another player in it. It'll be interesting to watch. All in all, this wasn't something that was going to be super additive to their top or bottom line, just because the scale isn't there yet. It's something that's definitely worth checking in on for us in a couple months.
O'Reilly: Cool. Thanks for your thoughts, Dylan.
Lewis: Always a pleasure, Sean.
O'Reilly: Have a good one. If you are a loyal listener and have questions or comments we would love to hear from you. Just email us at firstname.lastname@example.org. Again, that's email@example.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!