It's safe to say Apple (NASDAQ:AAPL) has a long, beneficial history with the music industry. After former CEO Steve Jobs came back to Cupertino to steady a company in distress, Apple brought its digital-music player -- the iPod -- to market, leading the company in a tremendous mobile-device supercycle that has persisted to this day. The iPhone, iPad, and Apple Watch all have features derived from the Apple's iPod.
And while the iPod was certainly sleek and intuitive, the real genius was its iTunes music store. At the time, major labels were more worried about piracy in the digital realm than how to profit from this new distribution channel. Apple was able to shape this industrywide change to its advantage and still dominates the digital download market.
Ironically, it seems Apple fell victim to another shift as music migrated away from digital downloads to streaming-based delivery. Recently Apple has introduced a comprehensive streaming service, Apple Music, but it trails industry leaders like Spotify and Pandora with user adoption. But a new move from Spotify could help Apple Music narrow that lead.
Spotify's shift could help Apple Music
For Spotify, its relationship with major music labels is an uneasy one. On one hand, labels and artists have become dependent on the new and growing revenue source it provides. On the other, however, ad-based streaming services are a decidedly less lucrative business model for content owners. Major record labels have been pushing Spotify to transition more quickly to a subscription-based model that would allow the streaming-music provider to pass more revenue to labels.
Spotify has a subscription-based tier, it's just the vast majority of its users use the free, ad-based version. Recently, it seems those labels have made some headway in convincing Spotify to change, according to a report from Digital Music News, and Spotify will now shift to a premium "gated-access" model where certain songs and albums will only be available to subscription-based users. And while the move is made to transition ad-based users to subscribers to placate record labels, a lower-quality free tier could grow Apple's streaming-music service.
Apple's three-month free service could get another look
While the article doesn't mention when this change occurs, it does note Spotify's deals with Sony, Warner, and Universal are up for renewal in the next two months. For Apple music, however, the company has already negotiated three free months for new subscribers and could benefit from Spotify users upset about a lower-quality product. The company could win Spotify defectors, upset about a lack of new content.
Recently, Apple announced 11 million subscribers had signed up in the first four weeks for Apple Music. And while that pales in comparison to Pandora and Spotify's 80 million and 75 million active users, respectively, Apple users agreed to pay after the free period whereas many Pandora and Spotify users have never provided a method of payment. Even if half of the 11 million decide to cancel service, Apple will have the third-largest subscriber base behind Spotify and Deezer.
Of course, the great thing for Apple and its investors is this is essentially incremental revenue and profit. Unlike Spotify and Pandora, whose entire business model is built on streaming, this is an added feature to entrap users into its sticky ecosystem to sell higher-margin iDevices.