Apple (NASDAQ:AAPL) plans to launch its streaming video service, Apple TV+, for $four.99 a month in November. It is also providing a free yr of entry to anybody who buys a brand new iPhone, iPad, iPod Contact, Apple TV, or Mac.
Apple is undercutting all its rival providers — together with Netflix, Amazon Prime Video, and Disney+ — within the streaming market. Nonetheless, Monetary Instances not too long ago claimed that Apple may go a step additional and merge Apple TV+ and Apple Music in a brand new bundle.
Apple Music at present prices $9.99 a month, and the FT report claims that the mixed bundle may value $13. There’s additionally speak about a “tremendous bundle” of providers that might deliver Apple Information+ and Apple Arcade onboard.
Apple’s technique would propel it towards its goal of producing $50 billion in annual providers income by 2020. It will additionally strengthen the partitions of its ecosystem and lock in revenue-generating customers as its gross sales decelerate. Nonetheless, Apple’s media bundles may additionally harm Spotify (NYSE:SPOT) and spark protests from document labels.
Working its media platforms as loss leaders
Spotify ended final quarter with 108 million paid subscribers and 129 million ad-supported month-to-month energetic customers. Apple Music, which solely operates as a paid service, hit 60 million subscribers in June.
Apple Music, Spotify, and different streaming platforms all beforehand paid 10.5% of their revenues as royalties to document corporations. Final yr, the Copyright Royalty Board (CRB) dominated that the speed would progressively rise to 15.1% by 2022.
Apple does not disclose Apple Music’s income progress or profitability, however its margins most likely aren’t significantly better than Spotify’s. Spotify posted a gross margin of 26% final quarter, however its working margin stayed within the purple at adverse zero.2% attributable to larger labor prices, payroll taxes, and stock-based compensation bills.
Apple does not want Apple Music to be worthwhile, since it might probably offset the unit’s losses with extra worthwhile providers just like the App Retailer. As a substitute, Apple views Apple Music as one other method to lock customers into its walled backyard of providers, be sure that they preserve shopping for Apple gadgets, and enhance its income per person as its gross sales decelerate.
The identical logic applies to Apple TV+. That is why it reportedly spent $6 billion on the platform’s preliminary lineup of exhibits. At $60 per yr, it will want 100 million members to interrupt even on its preliminary funding — which appears unlikely with that many rivals out there.
Merely put, Apple is keen to run Apple Music and Apple TV as loss leaders to increase its ecosystem. Bundling each providers, together with Arcade and Information, right into a single service would complement that technique. Apple’s transfer appears to focus on big tech rivals like Amazon and Alphabet‘s Google, which each bundle their streaming video and music providers collectively — but it surely may additionally harm stand-alone streaming gamers like Spotify.
Why Spotify ought to fear
Apple’s bundles may attraction to its iPhone homeowners, who account for 13% of the world’s smartphone market, in line with IDC. It is also a sexy alternative for Apple TV homeowners, who comprised 13% of the U.S. set-top field market final yr, in line with eMarketer.
In the meantime, Spotify’s common income per paid subscriber has been declining lately attributable to shifts in its product and geographic combine. In different phrases, Spotify is increasing aggressively into lower-income markets, the place it costs considerably lower than its $10 per thirty days price within the U.S.
If Apple goes by with its bundling plans, it may power Spotify to decrease its costs in larger revenue markets just like the U.S., which would cut back its common income per subscriber and squeeze its margins.
However document labels may cease Apple’s grasp plan
This all sound like dangerous information for Spotify, however Monetary Instances claims that a minimum of one main document label opposes Apple’s plans. The reason being easy: The proposed bundle reduces Apple Music’s whole income, which would cut back the document labels’ percentage-based reduce. If different platforms are compelled to match Apple’s costs, the document labels would generate decrease royalties.
Apple’s grasp plan will not work with out the assist of the large three document labels — Warner Music Group, Sony Music Leisure, and Common Music Group — so their unwillingness to alter the established order may defend Spotify from Apple’s ambitions. But when Apple wins over the labels, Spotify traders ought to brace for a brutal pricing conflict and wider losses.