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For Apple Music, a Symbolic Test Comes on Wednesday

By Evan Niu, CFA - Sep 27, 2015 at 11:00AM

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Apple Music's Day 1 adopters are about to have to choose whether they're willing to pay to stay.

Image source: Apple.

In some ways, Apple's (AAPL 4.01%) new Apple Music streaming service is one of the most important services that the company has launched in years. At a time when consumer preferences have been rapidly shifting away from owning music toward streaming music, a legitimate case could be made that Apple was starting to incrementally lose relevance in the music industry. Even though iTunes has never been a meaningful profit driver, music is important to Apple strategically and sentimentally.

As such, investors should mark Wednesday on their collective calendars as an important date for the Mac maker's big foray into on-demand music streaming. That's the day that marks the 3-month anniversary, which also marks the end of the initial 3-month trial period for anyone who signed up immediately when Apple Music launched on June 30.

Will they pay to stay?
Anyone that signs up for Apple Music membership is entitled to a free 3-month trial, but you can expect that Apple got a massive wave of sign-ups on launch day, even as Apple Music has continued to steadily garner subscribers since the summer launch.

Less than a month after launch, industry trade site Hits Daily Double reported that Apple Music had quickly grabbed over 10 million trial subscribers. If there were any doubts as to the accuracy of that figure, services chief Eddy Cue officially confirmed to USA Today about a week later that Apple Music was up to 11 million trial subscribers. Fast forward another couple of weeks, and in an effort to debunk a bogus third-party estimate from MusicWatch on retention, Apple would say that 79% of trial members were still actively using the service.

The most recent data point is The New York Post saying last week that Apple Music now has 15 million trial subscribers. The Post's sources say that roughly half of these trial members have not deactivated the auto-renewal. While this statement seemingly contradicts Apple's 79% usage figure, they may not necessarily be mutually exclusive. Apple merely indicated how many people are still using the service, independent of whether or not they've deactivated the auto-renewal. During the trial, you can still use the service even if you've deactivated auto-renewal.

With Day 1 adopters last free day coming up on Wednesday, Apple Music will face a symbolic test of whether or not it has built a compelling service to put pressure on competitors.

The real test is yet to come
The reason why I say it's a "symbolic" test is that in the grand scheme of things, Apple Music is so young that the real test will take place in the months and years to come. It's not a question of how many Day 1 adopters Apple can keep, but rather how many paying Apple Music subscribers Apple can garner in the long-term. Even using The Post's figures, 7.5 million members paying at least $10 per month (if not the $15 per month family option) is at least $225 million in revenue per quarter, or nearly a $1 billion annual run rate already.

That's a nice addition to Apple's current Services segment, which has generated $19.4 billion in TTM revenue, and Apple Music's subscriber base will likely continue growing from here.

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