Gene Munster: Apple Converts Paying Music Customers Far Better Than Spotify Does

The market for paid music streaming in the U.S. continues to grow, thanks in large part to Apple (NASDAQ: AAPL) and Spotify (NYSE: SPOT). Apple was able to recently become the top dog in the U.S., wrestling the title away from its Swedish rival. While Apple CEO Tim Cook has tried to reframe the narrative around the overall market growing, investors are still keenly interested in how the two companies are faring against each other.

Apple is converting users to paying subscribers at a much faster rate than Spotify, according to longtime Apple analyst Gene Munster.

Apple Music continues to chip away at Spotify's market share

In a Loup Ventures case study, Munster points to several factors that contribute to its stronger conversion rate. iOS users tend to have more disposable income than Android users, and Apple is able to better integrate Apple Music throughout the platform, which not only makes for a "seamlessly integrated music experience," but also allows Apple ample opportunities to nudge users to sign up. Munster estimates that Apple now has 21 million Apple Music subscribers in the U.S., compared to Spotify's estimated 20 million.

Globally, Spotify is still in the lead by a significant margin, with 62% market share towering over Apple's 34% share. But if you look at those market shares directionally, Apple is steadily chipping away: Spotify has lost about 3 percentage points over the past year, while Apple has added 4 percentage points.

The analysts measured conversion rates for both companies, and estimate that the average conversion rate for Apple is 0.64%, much stronger than Spotify's 0.24% conversion rate. Loup divided quarterly subscriber additions by the addressable market for its methodology. Spotify has a much larger addressable market and also offers a free tier, two factors that could contribute to its lower conversion rate.

What about conversions for other services?

More broadly, Apple's relative strength in converting trial users to paying Apple Music subscribers applies to other services. The company has been emphasizing how important its services business is recently, vowing to double revenue by 2020 compared to 2016. Not only is services revenue extremely profitable, but it also isn't subject to seasonal swings like consumer hardware is, and recurring revenue provides investors with plenty of visibility.

Loup expects Apple to leverage the same benefits of vertical integration with other services, including its forthcoming video-streaming service, Apple Pay, and more. The company is even reportedly building a premium news subscription service, which has considerable potential if Apple can execute on converting users into paying news subscribers. Apple has been building out Apple News, bringing the service to the Mac platform while expanding its reach within other iOS apps; a subscription-based offering is the next logical step. The services business has a bright future.

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Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.