Apple Music's Goal: Some Subscribers Now, Lots of Hardware Sales Later
"Apple Music matters because music broadly is fundamental to the mobile phone experience"
Will Apple Music turn around the record business? Will Apple Music help Apple sell more iPhones and laptops? There are some guesses but little certainty to both questions.
While the music industry and tech blogs gave Apple Music their attention Tuesday, the business world seemed to take brief notice and go about its business. Many analysts had already given their tepid responses after the service was unveiled earlier this month: They mostly liked the look of the service and that Apple is improving its product line, but it wasn't enough to predict a big change to Apple's bottom line.
One certainly can't gauge expectations only looking at Apple's share price. Apple shares' 0.7-percent increase Tuesday barely outpaced the NASDAQ's 0.6-percent gain. That may be because any expectations of Apple Music's impact were likely already priced into the share price, but also Apple Music alone isn't likely to move the needle. The tech giant isn't launching Apple Music just for the revenue -- because, really, it won't provide much of the company's revenue.
Consider Apple's enormous size. Analysts predict Apple's revenue at $232 billion this fiscal year, according to the Financial Times. If Apple had Spotify's 20 million subscribers, revenue per 12 months would be just $1.92 billion, or 0.8 percent of Apple's annual revenue. To put that in comparison, if Apple weighed 195 pounds -- the average weight of an American male -- Apple Music would weigh just 1.6 pounds, or about the same weight as the original iPad.
But there could be a financial payoff down the road. Apple is investing in the iTunes brand and trying to stay relevant in digital media. The iTunes Music Store is losing steam and streaming is both the present and future of entertainment. Moreover, what Apple does now influences the company's performance down the road. iTunes is a "key ingredient" to Apple's continued success, as Daniel Ives, managing director and senior analyst at FBR Capital Markets, told CNBC.
Hardware, not software, is Apple's ultimate goal, and music has always been a successful complement to Apple's mobile devices and laptops. "Apple Music matters because music broadly is fundamental to the mobile phone experience," Piper Jaffray analyst Gene Munster told CNBC after the service was introduced June 9.
One positive note came from Cantor Fitzgerald analyst Brian White. Looking at Apple Music, the momentum of the iPhone 6 models and an "expanding digital ecosystem," White said Apple's future has never been brighter. He reiterated a $195 price target that's 55.5 percent above Tuesday's closing price.
Perhaps the most excitement about Apple Music came from Futuresource Consulting, although it doesn't involve Apple's share price. Futuresource predicted the service "will lead to a significant increase in streaming music subscriptions" and projected subscription services would account for "at least one third" of consumer spending on recorded music by 2016. That would be a feat. Assuming global revenues remain flat the next two years -- a likely scenario -- subscription revenues would need to grow 212 percent over two years in order to account for a third of revenues. If Apple Music causes global revenues to rebound, the growth rate would be even higher.
Subscription growth in excess of 100 percent per year would excite the music industry. It would prove Apple had been able to reach mainstream consumers previously untapped by competitors. And it would signal Apple had done well enough to stimulate interest in its hardware. In that way, the ultimate goals of the record industry and Apple are in good alignment.