CEO Tim Cook was once quoted as saying "music runs deep in Apple's DNA." And that makes sense. Apple's (NASDAQ:AAPL) recent mobile product supercycle started with the iPod -- a digital music player. Of course, the real genius was Apple's adjoining iTunes music store that served as a gatekeeper for digital downloads. The exploitation of this disruption in music transactions added billions to Apple's bottom line.
More recently, however, even digital downloads have been disrupted by the newest form of consuming music: streaming. Apple's still the market leader in digital downloads. This substitutional format, led by streaming-music providers Pandora and Spotify, has thrived at the expense of Apple's iTunes music-downloading business. For a comparison, in 2014 streaming-based revenues increased by 29% over 2013's figure, where digital downloads fell 8.5%.
In response, Apple recently released its Apple Music streaming service. And while the company certainly doesn't have the first-mover advantage against these competitors, it does have a huge, loyal user base of iPhone, iPad, and Mac users to market to. Luckily for Apple, it appears subscription-leader Spotify is making it easier for the company to compete.
Why Spotify is Apple's No. 1 competitor
While it's important to note that, technically, Pandora is the No. 1 streaming-music provider by total subscribers, according to data compiled and aggregated by Jackdaw Research, Spotify is the No. 1 provider for paid subscribers, with 20 million paid users. Considering Apple Music is a subscription-based service, and not an ad-based model, Spotify -- and its 20 million-subscriber total -- is Apple's true competition and the barometer of success for Cupertino.
While it's still during Apple's three-month trial period, it looks as if Apple will join the list of top streaming companies by subscriber count once its trial period ends. Earlier this month, Apple disclosed that it had 11 million Apple Music subscribers in the three-month free period. The question is: How many of these subscribers will stick around once it ends? More recently, the company refuted a report from MusicWatch in regard to its 48% retention rate for Apple Music subscribers, stating that 79% of its users are still using the service.
Even using Music Watch's lower figure, and Apple's initial 11 million figure, Cupertino is still No. 3 behind European service Deezer's 6 million subscribers. If Apple's nearly 80% retention rate holds, the company's nearly 9 million subs propels it to No. 2.
Is Spotify its own worst enemy at this point?
Interestingly enough, Spotify is quickly becoming its own worst enemy in its battle against Apple. Under pressure from major labels that are upset about its inability to quickly turn ad-based users into more-lucrative subscribers, Spotify is now shifting to a "gated-access" model that will limit music access to non-paying users. While Apple is a subscriber-based service, the company's trial period could entice new users disaffected with Spotify's limited playlist.
But at least that makes sense: Spotify is under pressure from those content providers to better monetize users. These types of stakeholder disputes are normal and expected. However, the newest Spotify misstep appears to be totally self-inflicted and has the potential to drive even more users to Apple Music.
More broadly, however, in the face of continued competition of a deep-pocketed rival, Spotify needs to rise to the challenge and execute to continue to grow market share -- not to lose subscribers over a lack of clear communication.
Jamal Carnette owns shares of Apple. The Motley Fool owns and recommends Apple and Pandora Media. 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.