Apple Music. Image source: Apple.
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The first time around, Apple (NASDAQ: AAPL) helped the music industry navigate the digital transition. The challenge in the late '90s that the industry faced was the rise of piracy, as digital files of music were easily copied and shared illegally. Apple's role was to help consumers come to terms will opening up their wallets in a digital world, in part by making it easier to buy digital music legally.
This time around, the Mac maker is helping the music industry navigate the streaming transition. The challenge now is that the early innings were dominated by ad-supported models where users more or less got to listen for free. The basic goal remains the same: Convince consumers that music is still worth paying for.
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The RIAA has released its midyear 2016 report (link opens PDF) on industry revenue, and revenue from subscription services is helping the industry grow despite falling unit sales of both physical and digital copies. Retail revenue rose 8% to $3.4 billion, putting up the best growth in decades. Notably, streaming subscription revenue accounted for nearly half (47%) of that total. Streaming revenue is driving growth of digital music revenue, while permanent downloads are relatively flat.
Image source: RIAA.
Meanwhile, ad-supported on-demand streaming has stagnated. This is the part of the market that the industry has always hated, since not only is the revenue modest but it cheapens the value that consumers place on music in general. Consumers expecting to get music for free if they endure ads is not a good thing for the viability of the industry.
Image source: RIAA.
However, Apple isn't alone in helping to transform the industry. Spotify is by far the biggest player when it comes to paid subscriptions, with 40 million paid subscribers. That's more than twice Apple's 17 million paid subscribers.
Data sources: Apple and Spotify. Chart by author.
But the big difference is that Spotify still offers an ad-supported on-demand service, while simultaneously offering a paid subscription that includes a wide range of additional features such as unlimited skips and offline listening. Spotify hit 100 million total active users in June, meaning it has convinced roughly 40% of its user base to pay up for premium. On the other hand, Apple only offers a paid version (after a three-month free trial). That's a strategic decision that has undoubtedly won the Mac maker many friends within the music industry.
Apple and Spotify both sit at the same price points with individual and family plans (at least if you don't subscribe to Spotify through the app). Paying subscribers now pay $120 per year, which is far more than the average person previously spent on music annually in the pre-streaming era. More importantly, consumers now get a lot more for their money. Instead of adding a few albums a year, people have access to more music than they could possibly need.
This probably won't be the last time that Apple helps usher in a new model for the music industry.
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Evan Niu, CFA 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. 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.