Sources recently told the Wall Street Journal that Apple's (NASDAQ: AAPL) streaming music service, Apple Music, now has more paying customers in the U.S. than its rival Spotify (NYSE: SPOT). Apple Music now has 28 million paying subscribers in the U.S, compared to Spotify's 26 million, and is growing at a faster rate than its competitor both domestically and internationally (though Spotify still has more total subscribers).
Apple Music's success in the U.S. is great news for the company on its own, but it's also a good indicator of how Apple might be able to succeed with all of the services is just debuted just last month. Here's why.
Can Apple replicate this success with its other services?
Just a few weeks ago Apple unveiled four new services that the company is, essentially, betting its future on. Apple's services only accounted for 14% of the company's total revenue last year, but revenue from the segment grew 19% year over year in the most recent quarter -- compared to iPhone sales, which fell 15%.
As iPhone sales have declined, the company has pivoted to subscription-based services, including Apple News+, Apple TV+, its new Apple Card credit card, and its Apple Arcade video game service.
This push has understandably been met with some skepticism, but the company's recent success with Apple Music shows that the iPhone maker can enter a saturated services market and convince tens of millions of its hardware users to pay for recurring monthly subscription.
Spotify entered the U.S. music streaming market in 2011, giving the company a nearly four-year head start compared to Apple. Apple also faced competition from Pandora and even Amazon Music at the time. And yet it's been able to convince 28 million people to pay for its service in just a few short years (Apple doesn't offer a free, ad-supported version, unlike Spotify).
Of course, there's no guarantee that the company's success with Apple Music means it'll see the same results with Apple News+, Apple TV+, or its other services. But Apple has proved that it can enter a new services market and take down one the biggest competitors in the U.S. That in and of itself should calm investors, who wonder if Apple's services bet is a wise one.
Another key ingredient to the company's potential services success comes from Apple's ability to grow sales in the segment already. In 2016 Apple's services revenue was $24.3 billion (about 11% of total sales), but that figure jumped to $37.2 billion in 2018 (14% of sales). With Apple News+ just a few weeks old and Apple TV+ not available until this fall, it's likely that Apple will be able to increase those services sales even faster than before.
When you consider that Apple Music is already succeeding and that Apple was already increasing its services sales before it introduced its new services, there's a good chance that the company will be able to apply the same services strategies to its new businesses and replicate Apple Music's success.
Not everything will work
The company is making a tough shift away from hardware sales, forcing its top and bottom lines to rely more on services revenue. So there will likely be some growing pains as the company figures out which services its users want and how much they're willing to pay for them. But investors should see the success with Apple Music as the beginning of the company's likely long-term potential to significantly benefit from its services push.
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