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The Next 10 Million Won't Come as Easy for Apple Music

By Rick Munarriz - Jan 12, 2016 at 7:05PM

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The iEverything company reportedly hits a big milestone in paying subscribers to for its premium music service.

Apple (AAPL -0.57%) is getting a lot of people to pay up for its streaming music platform, but let's not assume that it will keep rocking at this pace. London's Financial Times reported over the weekend that Apple Music has topped 10 million premium subscribers. 

That's a pretty big deal for a service that didn't launch until the end of June -- and didn't start charging its first customer until late September. Streaming pioneer Pandora (P) has less than 4 million premium accounts. Global market darling Spotify has just twice as many paying subscribers.

Apple Music has come a long way in a matter of months, but let's frame this achievement in its proper perspective. Apple's nascent platform isn't a Pandora or Spotify killer, yet. There are several important considerations in assessing the significance of Apple Music at 10 million subs, something that it should be pointed out that Apple itself did not initially confirm.

The last time the class act of Cupertino officially put out Apple Music numbers was mid-October when CEO Tim Cook talked up the prospect of its 6.5 million subscribers. That was halfway through the first quarter that it started charging customers. If we're at 10 million now it means that Apple Music gained half as many net additions of paying subscribers during the second half of the quarter than it did during the first half.

That's not a surprise. Apple generated a ton of publicity out of the gate with the summertime launch of Apple Music. It's only natural for things to settle down once the honeymoon period passes.

If anything, the two data points that Cook provided at the time -- 6.5 million paying subscribers and another 8.3 million music fans participating in the free trial -- make 10 million premium accounts seem pretty applause worthy. 

Apple was launched at the end of June with everyone getting three free months to kick the tires. It wasn't until the end of September that the first bills for at least $9.99 a month began to be collected. Let's assume that more than half of those 8.3 million users have come to the end of the free trial since mid-October. This means that more than half of those decided to stick around as paying customers.

That's pretty impressive. We don't have a lot of data points in assessing how premium audio services historically perform at the end of trial periods. Sirius XM Radio (SIRI -0.38%) is perhaps our best measuring stick. It also offers lengthy trial periods to buyers of cars with factory-installed satellite radio receivers. Sirius XM's conversion rate is just 41% through the first nine months of last year. Apple is theoretically holding up a lot better than Sirius XM on that front, and that's before considering how many of the 6.5 million original paying subscribers are still around. 

If the 10 million figure is accurate it would mean that few of the 6.5 million early adopters flinched when their accounts started getting charged for something that they may have forgotten that they signed up to three months earlier. If that's not the case, then Apple's conversion rate of free trial users would be substantially higher than 50%. That is what makes this 10 million tally seem too good to be true, but let's roll with that since everyone else is accepting it as gospel. 

Even at 10 million, Apple has a long way to go to catch up to Spotify and Pandora. Apple Music is exclusively a premium service. Spotify and Pandora have much larger audiences who enjoy the platforms as ad-supported services. Spotify may have had 20 million premium subscribers as of June, but it also had a total of 75 million active accounts worldwide. Pandora had 78.1 million active listeners. In short, Spotify and Pandora combine for more than 153 million regular users.

Apple has come a long way in a short time, but it's a distant third in terms of active users. It's also fair to say that it is done picking the low-lying fruit. Wedging the Apple Music interface into iTunes and iOS devices has helped it cash in on its captive audience, but now it's at the mercy of folks switching to iOS and those who passed on the initial suggestions to sign up.

Apple Music has done well, but it's still too early to call it a needle-moving success. The real challenge will come in the year -- and years -- ahead.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of 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.

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