What Apple Music's Blistering Start Means for Spotify

Source: Apple.

Many expected Apple Music to become an overnight success, but few predicted the kind of heady growth recently released by a key Apple executive.

According to a recent report, in the five of weeks since its launch, Apple Music has already grown to over 11 million users. Small for the scale of Apple, yes, but such accelerated user uptake implies Apple Music represents a massive opportunity for Apple. However, when thinking about the streaming market's possible size in greater detail, these recent figures indicate Apple and on-demand rival Spotify could be headed for a subscriber showdown sooner than many realize.

Apple Music off to a strong start Last week, Apple SVP of Internet and Software Services Eddie Cue provided a set of updated user growth figures for Apple Music, divulging that more than 11 million subscribers have activated the promotional 3-month trial for the service. Importantly, that number includes two million accounts opting for the multi-user family subscription tier, which carries with it a more expensive price tag of $14.99 per month. Assuming all current account holders convert to paid subscriptions when their 3-month preview period expires, this places Apple Music at a revenue run rate that should surpass $1.5 billion in sales at some point this week.

Source: USA Today and Apple.

In other words, it took Apple a mere 36 days to reach the same revenue run as the nine-year-old Spotify earned throughout 2014. Even if a healthy portion of its current user base opt out of Apple Music at the end of their three-month free trials, Apple Music will almost assuredly surpass Spotify in terms of its financial performance by the end of calendar 2015.

But can they co-exist? This is perhaps the defining question of the Apple Music versus Spotify narrative. Can the two companies each carve out its own sizable businesses in this space, or will on-demand music evolve into a winner-take-all scenario?

Combining data from several sources, we know only about 27.5 million (~3.4%) of Apple's 800 million active iTunes accounts spent the equivalent of an annual Apple Music subscription in 2014. Research firm Gartner claims about 2.62 billion total so-called connected devices (PCs, smartphone, tablets, etc.) will be operating by the end of 2015. Since Apple users tend to spend more than the average tech user and single users certainly own multiple device types (i.e., I own a laptop, two tablets, and one smartphone), both the actual percentage of subscribers and the streaming space's true "addressable market" both probably decrease the total potential market opportunity for Apple Music and Spotify.

For argument's sake, applying Apple's high-spending user conversion rate to the total active connected devices yields a projected possible markets size of a little over 90 million users.

Source: Apple., Gartner

With Apple Music already at 11 million users, Spotify's paying member base surpassing 20 million, and other smaller players in the spaceit appears the estimated paid on-demand music market, while offering some growth, doesn't provide the kind of exponential, multi-year growth potential tech investors often seek. Moreover, with their current combined user bases around one-third of their estimated ceiling, eventual competition between the two seems more likely than not.

Music industry sources also support the notion of a large, but limited potential addressable market for streaming services. According to music industry trade group IFPI, subscriptions to digital music services grew from 8 million in 2010 to 41 million last year, or at an average annual rate of roughly 50% per annum. Applying that same growth rate suggests digital music subscriptions will reach 61.7 million and 92.8 million in 2015 and 2016 respectively, which makes the above 90 million potential subscribers in 2015 seem plausible as check.

While the pie will get bigger, Apple and Spotify will clearly be duking it out for the biggest slice.

Should Apple Music and Spotify begin to compete more aggressively with one another, Apple enjoys a number of meaningful competitive advantages that tip the scale in its direction. Apple controls the user experience of hundreds of millions of iPhones and iPads, which allow it to position its Music app on the home screen, whereas its competitors cannot (a so-called "placement advantage"). Importantly, Apple also lacks the burden of having to run Apple Music for a profit, a luxury that Spotify in its current state certainly lacks.

In the end, Apple Music appears off to a resounding start. However, given what we know about the streaming music space more broadly, the stage also appears set for increased competition between two of the space's largest players.

The article What Apple Music's Blistering Start Means for Spotify originally appeared on Fool.com.

Andrew Tonner owns shares of Apple. The Motley Fool recommends and owns shares of 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.

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