Why an Apple Music Price Drop Doesn't Make Sense

By Markets Fool.com

Image source: Apple.

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Yesterday, Digital Music News reported that Apple (NASDAQ: AAPL) is seriously considering a major price drop. The reduction could be upwards of 20%, which would lower the monthly price from $10 to $8. The site is quick to point out that its sources are not within Apple, but instead have been working with Apple on the service since its launch last year. The move is also being framed as a potential defense to Amazon.com's (NASDAQ: AMZN) new Music Unlimited service that launched in October.

As with all Apple rumors, the standard caveats apply that these plans aren't finalized and are just preliminary discussions at this point. That being said, let's consider if a price drop would make sense for the Mac maker's streaming music service.

Pricing leaks are rare

First off, let's acknowledge how rare it is to see any leak regarding pricing strategy. We're all accustomed to product-based leaks that tease what gadgets Apple has in the pipeline, alongside any particularly interesting features. That's largely a function of Apple's global supply chain, and it's pretty tough to manufacture millions of physical products without anyone catching wind. There are simply too many workers to keep product details from leaking.

But pricing is different. There isn't really physical evidence when it comes to deciding how much to charge for a product or service. The sources here are supposedly privy to pricing discussions that Apple is having.

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But at what cost?

The potential price drop is $2 per month on both the individual and family rates. The student rate of $5 per month would remain unchanged.

Rate

Current

Possible New

Individual

$9.99 per month

$7.99 per month

Family

$14.99 per month

$12.99 per month

Source: Digital Music News.

Considering the fact that Apple Music had about 17 million paid subscribers in early September, a $2 discount per month translates into a little over $100 million in lost revenue per quarter. While that's not exactly the kind of money that CEO Tim Cook loses sleep over, it's important that Digital Music News says that Apple would be covering that cost itself. The record labels aren't willing to concede on their cut, so Apple would foot the bill related to any discount.

Amazon is reportedly doing likewise, which is completely characteristic of the e-commerce giant's aggressive ways. However, Amazon Music Unlimited also costs $10 per month for non-Prime members. Prime members can subscribe for $8 per month, but that's in addition to the $99 per year Prime subscription fee. Of course, Prime comes with a lot of bundled benefits, making any direct comparisons hard. This is why an Apple Music price cut doesn't make sense, since it seems unnecessary. If Amazon's stand-alone Music Unlimited were undercutting Apple, it'd be a different story. But it's not.

I don't see Music Unlimited as much of a threat to Apple Music. The main category of potential defectors would be Prime members. Sure, there are tens of millions of them with substantial overlap with Apple's customer base, but Music Unlimited won't integrate across all Apple devices as seamlessly. Perhaps more importantly, what kind of message would that send to the market? It wouldn't look good if Apple announced a price cut just over a year after launch. Apple Music launched in June 2015, and the three-month free trial meant that it didn't start billing until September 2015.

Apple wins friends in the record industry with its efforts to preserve value perception, something it controversially did with the e-book market and publishers a few years back. The music industry would certainly prefer people to value music services more rather than less. Apple should stand pat.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Amazon.com and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.