The Downside of Apple Music's 79% Retention Rate

Countering a third-party estimate, Apple says that 79% of Apple Music users are still using the new streaming service. But what about the rest?

Evan Niu
Evan Niu, CFA
Aug 19, 2015 at 4:00PM
Technology and Telecom

Source: Apple.

Earlier this week, music industry researcher MusicWatch made headlines by proclaiming that Apple's (NASDAQ:AAPL) new streaming service, Apple Music, was seeing nearly half of its U.S.-based users quickly abandon the service. That sounds rather dire, enough so that the typically silent company from Cupertino officially responded to the press. In a statement to The Verge, Apple said that 79% of users that had signed up are still using the service.

Let's dig through these digits.

Looking at MusicWatch
MusicWatch says that 11% of respondents are using Apple Music. Of these, 48% have stopped using the streaming service. An encouraging 64% of current users are willing to keep their subscriptions once the free trial runs out. Although somewhat contradictory, 61% of respondents also said they had already turned off the auto-renewal feature.

This is one of the problems with market researchers that use relatively small sample sizes. MusicWatch's data is based on a survey of 5,000 U.S. consumers. While a sample size of 5,000 would typically be considered statistically relevant, there are inevitable shortfalls when you try to extrapolate that data to a user base that is in the tens of millions. The same can be said about other research outfits, like Consumer Intelligence Research Partners, which typically only survey 500 consumers. That's not to say that the data points are irrelevant, but rather investors should acknowledge the inherent shortcomings.

Apple was quick to shut the storyline down with its own data.

A fifth of users have stopped using Apple Music
While the 79% retention rate that Apple cites is much more encouraging than the third-party estimate, there is a downside. Specifically, consider the inverse -- 21% of users no longer use the service, by Apple's own implicit admission. That figure is a little too high for comfort.

Remember that Apple Music launched on June 30, so by definition all current subscribers are still on the three-month free trial and no one has paid a penny for the service yet. So we're talking about over a fifth of users currently on a free trial walking away. That's discouraging, since Apple has high hopes for Apple Music. What happens when those free trials are up and it's time to pay up? That retention rate presumably falls even farther.

Apple Music and Apple Pay are two important new services that Apple has launched recently. On the last conference call, Tim Cook acknowledged that both are "very important to us." Apple Music represents Apple's answer to the secular shift in consumer preferences away toward streaming. As important as the music industry has been to Apple's success, it would add insult to injury.

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This is just the beginning
Apple services chief Eddy Cue told USA Today in early August that Apple Music is up to 11 million free-trial subscribers. Of that total, 2 million have signed up for the family plan pricing of $15 per month. Parsing Apple's words, roughly 8.7 million of those users are still active.

Apple Music is a big part of how Apple hopes to grow its services business, which is already at nearly $20 billion in terms of trailing-12-month revenue. The good news is that the service just launched, and even if the retention rate could be better, Apple has a lot of time to continue iterating and improving the service.