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Assessing Apple's Streaming Push to Take on Spotify & Netflix

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Shares of Apple (AAPL - Free Report) climbed over 1% through midday trading on Monday as investors continue to seem pleased with the progress the company has made to branch out beyond the iPhone. Now, reports suggest that one of Apple’s most successful new ventures, Apple Music, is already close to surpassing Spotify (SPOT - Free Report) in one key region. So let’s quickly break down Apple’s streaming music and video future.

Apple Music

Reports surfaced late last week that said Apple Music boasted between 21 million to 21.5 million subscribers in the U.S., which came in just behind Spotify’s roughly 22.5 million, according to sources cited by the Financial Times. Last year Apple boasted 13 million U.S. subscribers against Spotify’s 17 million.

Yet, the report suggests that Apple is expected to match Spotify’s U.S. subscriber base by next month, which is pretty insane considering that Apple Music launched in June 2015 while Daniel Ek founded Spotify in Stockholm all the way back in 2006.

Apple has been able to grow its streaming music base by successfully converting iPhone users to its platform. “Spotify has always targeted music lovers, who tend to be a bit younger and were early adopters of streaming,” Midia Research analyst Mark Mulligan told the Financial Times.

“A lot of that base has been soaked up now, whereas Apple has a much wider customer base. They can get those more mainstream people very easily because [Apple Music] is already in their phone, and they already have their credit card info.”

Clearly, the U.S. market is just one part of the overall music streaming industry. But Apple Music also flexed its muscles recently when the iPhone giant’s service accumulated 170 million streams of Drake’s new album in the first 24 hours, compared to Spotify’s 130 million.

Overall, Apple Music last reported 38 million subscribers, with CEO Tim Cook noting that his company’s streaming service claimed 50 million users when including those on a free-trial. With that said, Spotify is still the most dominant player in the streaming music industry, having last reported 170 million users.

Spotify claimed 99 million ad-supported users along with 75 million paid customers, with premium customers making up over 90% of its $1.37 billion Q1 revenues. Furthermore, the company’s premium users climbed 45% from the year-ago period, outpacing the free version’s growth of 21%.

Investors should note that Spotify, Apple, and all the other streaming music companies have to pay high royalty fees to the major record labels. However, unlike Netflix (NFLX - Free Report) , which has been able to become its own movie and TV studio, it will be much harder for the streaming music players to become their own record labels. Therefore, Apple and other streaming music players, including Amazon (AMZN - Free Report) and Google’s (GOOGL - Free Report) YouTube Music, will simply have an easier time spending money on music rights in perpetuity.

Streaming Video

Apple’s second-quarter revenues jumped by 16% to reach $61.14 billion, with iPhone revenues up 14%. Yet, iPhone unit sales climbed only 3% and iPhone revenues accounted for over 62% of total Q2 sales. Luckily Apple’s Services revenues—which includes Apple Music—surged roughly 31% to hit $9.19 billion, making it the company’s second-biggest revenue generator, nearly outpacing iPad and Mac’s growth combined. 

On top of Apple’s visible push into streaming music, the company has started to push into the streaming television world in a major way. The company hired the former co-presidents of Sony Pictures Television, Zack Van Amburg and Jamie Erlicht, last June to head up Apple’s original programming division.

Since then, Apple has gone on a major spending spree to scoop up original TV content, featuring some of the biggest directors and actors in Hollywood, in a move that many speculate will eventually lead to the launch of an Apple streaming platform as soon as March 2019—Diseny (DIS - Free Report) is expected to debut its streaming platform in late 2019.

It is unclear at this time if Apple will sell this service as a stand-alone product or if it will possibly bundle in Apple Music, its news offerings, iCloud storage, and more. What is clear is that Apple has already amassed a large collection of shows, which include a reboot of Steven Spielberg's original series Amazing Stories; an animated series from the Emmy-winning creator of Bob's Burgers; a world-building drama from the Peaky Blinders creator; an untitled show starring Jennifer Aniston and Reese Witherspoon; a psychological thriller from M. Night Shyamalan; and many more.  

Cleary, it will be hard to compete against Hulu, Amazon Prime, HBO, and Netflix right off the bat. But Netflix itself proved that spending on the right content can turn your platform into an industry leader—House of Cards didn’t even debut until February 2013. And remember, Apple Music is already nipping at the heels of Spotify in the U.S.

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