Music subscriptions are overcoming Apple’s download downfall. But is there growth here?
Deep inside the question-and-answer period of Tuesday’s Apple earnings call, its Chief Financial Officer, Luca Maestri, said something of importance to the music industry: Apple’s music revenue has hit a bottom and reached “an inflection point” after declining for “a number” of quarters. Without singling out Apple Music, Maestri’s comment almost certainly suggests the subscription service’s growth is overcoming declines in download revenue.
Tuesday’s overall report was gloomy. Apple reported a 9-percent decline (at constant currency) revenue due to “ongoing macroeconomic headwinds in much of the world,” said CEO Tim Cook but mainly a sharp slowdown in iPhone sales. The shortfall prompted an emphasis on the value of the revenue potential in Apple’s 1 billion installed base, a shift in messaging clearly meant to cover up the disappointing quarter. In investor and public relations, companies lead with the positive and bury the negative.
Nevertheless, the entertainment industry can’t overlook Apple’s comments about its install base. This is what drives music, app, video and other consumption on Apple devices. Even though Apple users can easily opt for competing services such as Google Maps and Pandora, 1 billion devices provide Apple an unmatched gateway to offer cloud-based services such as App Store, Apple Pay, iCloud and its Apple Music subscription service.
It’s no secret that services are growing in importance. Service revenue rose 20 percent to $6 billion, 11.8 percent of the $50.6 billion in total revenue. Last year, $5 billion of services accounted for 8.6 percent of Apple’s $58.0 billion in total revenue. To the extent Apple is losing market share to Android in important markets such as China, and considering people aren’t upgrading their iPhones at previous rates, service revenue is a vital area of growth.
Music plays a small part in the services division. Billboard estimates Apple Music and iTunes combined for roughly $800 million last quarter, or roughly 13 percent of services revenue. It’s a back-of-the-envelope number that assumes Apple has a 70 percent share of global download sales, one-quarter of Apple Music subscriptions are family plans, and Apple counts each family plan user as a subscriber (there have been rumors that subscription services take this approach to counting subscribers). All in all, it’s a conservative number and a fair guess.
The good news for both Apple and the music industry is that $800 million (or so) of music revenue can remain stable and, if Maestri’s comments are to be trusted, possibly grow in future quarters. Growth does seem possible. If download sales continue the 10 percent decline experienced in 2015, Apple would make up the revenue loss by gaining just 1.5 million subscribers at $9.99 per month. Given the fact that Apple Music’s subscriber count grew by 2 million in the last two months, 1.5 million over 12 months is a certainty.
Global recorded music revenue grew 3.2 percent last year, according to the IFPI. If Apple music revenues are on the upswing, 2016 should be another growth year.