Spotify Growth Surges Despite Apple, Inc.'s Revamped Apple Music

By Daniel Sparks Markets Fool.com

Apple's (NASDAQ: AAPL) launch of its Spotify-like streaming music service in 2015 was an important move for the tech giant. Not only did it bolster Apple's services business with a new subscription offering, but it strengthened the overall integrated ecosystem of Apple-branded hardware, software, and services that helpcustomers stay locked into Apple's products.

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But is Apple's music service failing to live up to its potential? Spotify's rapid growth since Apple Music's launch suggests Apple's new music service may not be resonating with customers the way investors hoped it would.

Image source: Spotify.

Spotify vs. Apple Music: By the numbers

Apple Music recently made headlines when Apple Internet Software and Products Vice President Eddy Cue told Billboard that the music service had surpassed 20 million subscribers. Cue also took the opportunity to give the world a glimpse of Apple's ambition with the service, noting that the company went from zero subscribers in June 2015 to 20 million in December 2016. "[O]f course we want more and we want it to go faster -- we're hungry!" Cue told Billboard.

But despite Apple Music hitting the 20-million subscriber milestone, Spotify's March 2 announcement that it just hit 50 million subscribers shows how its service is growing significantly faster than Apple Music recently. Spotify's reported 50 million paid subscribers is up from 40 million in the middle of September. This represents a growth rate of about 1.8 million paid users a month. Apple's most recent milestone of 20 million was up about 3 million users in three months compared to its last update on its paid users for Apple Music, representing a growth rate of about 1 million per month.

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Maybe Spotify is a bit hungrier than Apple?

There's no excuse for Apple Music's underperformance

Ahead of Apple Music's launch, everything lined up for the music service to quickly grow to rival Spotify, or at least to hit a point where it can sustain Spotify's growth rates. After all, Apple was already a music juggernaut with its iTunes. With Apple reporting in 2014 it had 800 million credit card numbers linked to iTunes, the service easily has over a billion credit cards on file in 2017. Adding to the growing list of reasons for Apple Music to be a smashing hit, Apple even redesigned Apple Music "from the ground up" this summer in an effort to accelerate demand for the service. Apple Music should have easily built on this strong foundation and catapulted the new music service to a level that threatened Spotify's dominance.

Apple Music. Image source: Apple.

What's even more concerning is that Spotify's meteoric growth only highlights how unfortunate it is that Apple hasn't built a streaming music service compelling enough to keep up with Spotify's stronger ability to attract new customers. Growing from 30 million paid subscribers last March to 40 million about three months ago to about 50 million now, Spotify is putting the spotlight on the strength of the streaming music market.

On the other hand, with Spotify's growth continuing to outpace Apple Music's, this new milestone for Spotify could potentially serve as a wake-up call for Apple management to begin investing more aggressively in its streaming music offering. And given Apple's $50 billion-plus in annual free cash flow, its resources to invest in its music service are virtually unlimited compared to Spotify's business model, which has yet to achieve profitability.

But given Spotify's ability to outperform Apple Music so far, Apple investors shouldn't count on Apple Music catching up to Spotify.

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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.