There was a clear divergence in Apple's (AAPL 1.10%) recently reported first-quarter results. On the device side, every listed product experienced flat or declining growth. Sales of the iPad dropped 25% from last year's total; the Mac line reported a 4% decline; and the signature iPhone reported a less than 1% gain. On the other hand, iPhone reported 26% growth in services on a year-on-year basis, helping the company report 2% revenue growth in face of device struggles.
In a supplemental release, Apple pointed to its 1-billion strong active installed base market as a source of future growth. In an interview with The Daring Fireball's John Gruber, Apple senior vice presidents Eddy Cue and Craig Federighi elaborated on how the tech giant will leverage its massive user base in order to keep its top line growing. If Apple Music is of any indication, the company will continue to grow its software-based revenue.
Apple Music is 11 million strong
Apple Music appears to be growing quickly. After Cook announced the service had hit 10 million paying subscribers during the first-quarter conference call on Jan. 26, Cue and Federighi reported Apple Music had 11 million subscribers last week during Gruber's podcast. Cupertino has been really up front about Apple Music's user base, compared to its secrecy about sales of the Apple Watch and other devices, which indicates that the company is satisfied with Apple Music's growth.
After launching in June, Apple quickly sprinted into the No. 2 spot among subscription-based digital music services, behind rival Spotify's 20 million subscribers. However, Spotify has a four-year head start.; Considering that Apple Music offers potential members a 3-month free trial, if it's already growing its paid membership by 1 million users per month, look for the company to push past its privately held rival soon.
Will anybody buy Pandora?
Although its still a young industry, there's increasing signs of consolidation in digital music. Last week, The New York Times reported publicly traded Pandora Media (P) met with Morgan Stanley to discuss options to sell the company. After debuting in 2011 at an IPO price of $16 per share, Pandora now trades at less than half that figure after years of treading water. While the company isn't as big as either Apple or Spotify -- with only 3.9 million subscription-based users -- it has a formidable total user-base through its advertisement model.
Apple probably isn't interested in Pandora specifically because of Pandora's user-base composition. Recently, Apple ended support for its ad-supported iTunes Radio, signifying a rejection of the ad-based business model. It's unlikely the company will reverse its stance and buy a digital music company whose revenues were drawn primarily from advertising.
A better fit for Pandora would be Spotify, as both boast subscription-based and advertising-based formats. Recently, analyst firm Edison Investment Research made that argument, suggesting Spotify would be the most-likely buyer. Consolidation would benefit Spotify on both sides of the business as more ad-based users would allow the company to negotiate higher placement rates. In addition, it would provide Spotify with more free service users that it could attempt to convert into more-lucrative subscribers.
But even if Spotify buys Pandora's 3.9 million subscribers, Apple's tremendous 1 billion active user base will be hard to compete with in the long run. Apple's device business may be slowing, but the company is looking to leverage those devices for high-margin, recurrent subscription-based software revenue.