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A New Apple Music Is Coming

By Evan Niu, CFA - May 4, 2016 at 2:30PM

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Apple Music is quite important to growing the company's service business, and a new interface will help.

Apple Music. Image source: Apple.

Just like they say, "Out with the new, and in with the newer."

It's now been nearly a year since Apple (AAPL -2.29%) jumped into music streaming with Apple Music, but the Mac maker is already working on a major overhaul to the service following some mixed reviews. According to Bloomberg, Apple is revamping the interface in an effort to make it easier to use and more intuitive. Apple will also broaden its radio service. 9to5Mac subsequently followed up with additional details regarding the upcoming changes. A redesigned user interface will be simplified and include features like lyrics and larger album artwork.

Apple is expected to unveil the changes at its WWDC developer conference in June.

How un-Apple
When Apple Music first launched, there were plenty of criticisms around the service's usability, even from loyal Apple journalists and fans like Jim Dalrymple. Since Apple chose to integrate Apple Music into the existing mobile app, the company was overly ambitious and stuffed too many features in at the expense of usability. It's a tricky balance when a single app manages both subscription streaming as well as previously purchased content.

The interface simply isn't all that intuitive, which is a definite knock against a company that prides itself on intuitive interfaces. It's possible that this has held back paid subscriptions (Apple does not offer an ad-supported free option). It's possible that a revamped interface can spur subscription growth.

13 million and counting
At last count, Apple had 13 million subscribers for Apple Music. To be clear, that's a strong start for the service's first nine months or so, and meaningful competition compared to Spotify's 30 million paid subscribers. But Spotify is growing at a fairly healthy clip, adding about 10 million subscribers per year for the past few years. It had 20 million paid subscribers in June 2015 and 10 million paid subscribers in May 2014.

However, expectations for Apple should be a lot higher, in which case the 13 million Apple Music subscriptions seems modest. Apple has incredible strength in cross-selling content and services to its users, and there are now 1 billion active devices in its installed base. The Mac maker hasn't shared any recent statistics regarding active iTunes accounts, but it had 800 million active iTunes accounts way back in 2014. Assuming active iTunes accounts have grown since then, that means the 13 million Apple Music members represents less than 1.6% adoption.

That's what he said
On the last earnings call, CEO Tim Cook and CFO Luca Maestri noted that the music business has now hit an important "inflection point." Music revenue had been in a steady decline for many quarters, as downloads were trending lower as consumer preferences shifted toward streaming. Now that Apple has both a download business and a streaming business, music revenue is ready to turn around.

Here's Cook:

And Apple Music continues to grow in popularity, with over 13 million paying subscribers today. We feel really great about the early success of Apple's first subscription business, and our Music revenue has now hit an inflection point after many quarters of decline.

Maestri followed up:

It's interesting for us that our Music business, which had been declining for a number of quarters, now that we have both a download model and a streaming model, we have now hit an inflection point. And we really believe that this will be the bottom and we can start growing from there over time. 

With Apple's recent emphasis on its services business, it needs to pull all the levers that it can to boost Apple Music subscriptions. To appreciate how much potential Apple Music has, consider the fact that each device within the installed base spends approximately $10 per quarter in content and services average. Apple Music costs $10 per month, or $30 per quarter.

So yes, growing Apple Music is incredibly important to the services business.

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