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Apple Music Is a Success: Here's Why It Doesn't Matter

By Jamal Carnette, CFA - Sep 27, 2015 at 6:00PM

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For Apple investors, Apple's music service is simply an asterisk in terms of revenue, but it's about more than dollars and cents.

Source: Apple.

In the early part of this century, no entity changed the music industry quite like Apple (AAPL 1.57%). While major record labels were more concerned with illegal downloads, and generally eschewed the transition to digital downloads, Apple introduced its iTunes Music store. In doing so, Apple effectively exploited this technological change and became the de facto gatekeeper of this new distribution outlet -- a designation it still owns to this day.

Ironically, Apple recently found itself on the wrong end of the innovation curve with the recent shift to streaming-based music services. While Apple continued to lean on digital downloads, new upstarts such as Pandora and Spotify led the transition to streaming-based delivery. Apple recently joined the fray with its Apple Music offering. According to The New York Post, Apple may be late, but it's going to be a player in the new format as well.

Apple Music seems to have solid uptake
Quoting sources within the music industry, the Post reported that Apple Music now has 15 million users since its late June debut. And while that would mean the pace of growth has slowed from the 11 million figure Apple's Eddie Cue boasted that the service had a month after going live, a slowing number of subscribers was to be expected. In the end, this is still a solid number for Apple -- but that's not the best news for Apple's service.

According to the Post, roughly half of the users have not turned off auto-pay, as the service is still in its three-month trial period. At the end of this month, many of those users will begin paying $9.99 per month, or $14.99 for a family plan. And while it's possible many of those will turn it off once reminded by a credit card charge, Mark Mulligan of MIDiA Research told the Post that even a 25% conversion rate would be a success.

Ecosystem-building versus direct profit
I think Mulligan's definition of success says more about the music industry -- and its desires -- than Apple's. In the end, I'm sure Apple wants this service to succeed, but it isn't necessary for the stock to enrich investors, nor will the service ever be a major part of its revenue haul. As opposed to Spotify or Pandora, which are single-service companies and are dependent on the streaming-music industry, this is simply an ecosystem play for Apple.

For example, Mulligan defines 7 million paying members as a "strong success," but even if true, and each user opted for the higher-cost $14.99 family option (highly unlikely), this would still only result in total yearly revenue of $1.26 billion. Of course, Apple reports streaming revenue on a net-sales basis, and after paying out 71.5% to artists, publishers, and record labels that optimistic number drops to $360 million -- or roughly 0.16% of the $224.3 billion Apple has grossed over the past four reported quarters.

In the end, Apple's real goal of its Apple Music service is to lock users into its sticky ecosystem to sell more high-margin iDevices. Therefore, when defining Apple Music as a success, the question needs to be asked: On whose terms? Because on a sales and profit standpoint, this is mostly an asterisk for investors but a huge boost to record labels. Simply put, the music industry needs Apple more than Apple needs the music industry. 

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