Source: Apple.
Apple (AAPL -1.22%) investors seem, at times, to be unaware of how impressive the company's financial results are. Although Cupertino generally monetizes its ecosystem through device sales, the company's Services revenue is impressive in its own right, even more so when compared to other large tech companies.
As an example, over the trailing 12-months, Apple recorded $19.4 billion in Services-based revenue. And while that's certainly not in the neighborhood of the $147 billion it recorded in iPhone sales alone, the total is certainly impressive.
For years, the bulk of this revenue came from iTunes downloads, as the company wisely exploited a wide-scale change in music consumption in the early aughts to become the de facto gate keeper for the format. More recently, however, the company's digital downloads faced tremendous pressure from streaming-based services like Pandora (P) and Spotify. According to CEO Tim Cook, Apple's recently launched answer to its streaming competitors has been a success.
Apple Music is converting free-trial users
At a Wall Street Journal conference, Tim Cook mentioned Apple Music now has 6.5 million paying customers, with another 8.5 million currently in the three-month free trial period. All told, this amounts to 15 million users currently enjoying the format. And while that pales in comparison to the 79.9 million and 75 million active users that Pandora and Spotify have, respectively, Apple has a major advantage the other two seem to lack: people will pay for subscriptions.
Cook's 15 million figure was by no means shocking. Earlier reports from within the music industry, as reported by The New York Post, disclosed the 15 million subscriber number last month. At that time, music analyst Mark Mulligan of MIDia Research speculated that the service would be a success if the service reported "more than 5 million paying subscribers" and a "strong success" if the company reported more than 7 million subscribers by year's end.
And while users can cancel at any time, the fact that Apple's pushing the top number with more than two months is a positive sign for Apple -- but more so for the music industry.
Ad-based versus sub-based revenues: most companies struggle to convert
For record labels, pure-play streaming services have been sort of a double-edged sword. On one hand, their popularity cannot be denied, and they are a good source of song discovery. On the other, however, the ad-based business model has been difficult to monetize in a meaningful way for artists, leading to some artists -- most notably, Taylor Swift with Spotify -- pulling their catalogs from the format.
Pure-play streaming-based services have argued the ad-based model exists as a gateway to the more lucrative subscription model. However, there's scant evidence that that's been really effective. As of the second quarter, Pandora reported only 3.9 million paid users -- a paid subscriber rate of roughly 5%. The firm reported Spotify doing a better job of converting active users, turning 75 million users to 20 million subscriptions, but still has only converted 27% of ad-based listeners.
But Apple's not most companies, is it?
Although it's not quite an apples-to-apples (pun intended) comparison, as Apple Music does not have a true ad-supported choice, Apple appears to currently be converting roughly 40% of its trial-period users to subscribers, and is now the second-largest music-streaming service, behind Spotify, by number of subscribers. Is it possible for that 40% number to slow? Sure, but Apple's choice to allow downloaded music from its library -- which will go away once Apple Music is cancelled -- is a powerful way to increase its stickiness.
In the end, however, Apple's not really dependent on Apple Music's revenue, treating the service as an ecosystem builder to sell high-margin iDevices. For investors, it's good to see Apple doing well in this industry, but not essential. For those in the music industry, however, this is great news. Not so much for Pandora and Spotify, though, as they now have a successful subscription-based model to compete with.
