Market Insight

Spotify extends lead over Apple Music

September 09, 2016

Jack Kent Jack Kent Director, Media and Advertising

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Spotify has extended its lead in the on-demand music market reaching a total of 39m paying subscriptions at the end of August 2016. Its closest competitor Apple Music announced 17m paying subscriptions at the start of September. Apple Music has been growing rapidly since its launch in mid-2015: it passed 10m subscribers at the beginning of 2016 and added a further 5m paying customers by June; but Spotify has extended its lead, which has grown from around 18m in February 2016 to over 22m by September. Quarter-on-quarter and year-on-year Apple Music has been growing at a faster rate than Spotify, but form a much lower base.

Other developments from both services include a renewed focus on video: Spotify launched its first video services in January 2016 and Apple Music will host exclusive “Carpool Karaoke” video content from TV host James Corden in a deal announced in September. 

 

Our Analysis:

Apple Music has helped grow the overall on-demand music business

As forecast by IHS, Apple Music’s 2015 launch has helped grow the overall on-demand music subscription business. Apple’s market entrance may not have dented Spotify’s lead, but it has forced it to adapt its pricing strategy. In response to Apple’s (and Google’s) more generous $14.99 per month six user family plans, Spotify followed suit switching from a $19.99 per month three user plan to match Apple’s pricing. Over recent years Spotify has also actively used price promotions such as student discounts and $0.99 per month three month trials to help convert free users and grow its premium subscriber base. As a result, IHS Markit expects that Spotify’s average revenue per user will have dropped over recent quarters. Smaller music services may have felt more of an impact from Apple’s debut: French provider Deezer has struggled for growth and cancelled plans for an IPO in 2015, ahead of its takeover by Warner Music owner Access Industries; Napster (now fully rebranded from Rhapsody) reported flat subscription numbers in mid-2016 at 3.5m, the same total as at the end of 2015.

Spotify remains committed to its free tier, for now

Unlike Apple Music, Spotify remains committed to offering a free ad-supported music tier with, for now, the exact same content catalogue available on both free and paid plans. This position has helped Apple Music secure a number of (timed) exclusive deals for access to high profile new releases. So far this approach has not impeded Spotify’s growth, but as the company enters into new rounds of rights negotiations with major labels Spotify may find itself under increasing pressure to allow some form of premium tier windowing – in which only paid users are able to access new releases for a certain period.

Profitability remains a challenge

Spotify reported a $194m loss in 2015 and its recent pricing flexibility will not have helped its bottom line. The company has raised more than $2.5bn in total disclosed funding, so it can cope with these losses but compared with competitors it will eventually face more pressure to achieve positive income. Apple Music’s role is to help boost its parent’s overall devices and services ecosystem and so it can be run at cost rather strive for profitability. Google Play Music Unlimited can serve a similar purpose for Alphabet and Deezer may face less pressure to turn a profit now it is controlled by Warner Music owner Access Industries.

Telco partnerships hold continued appeal

Pricing flexibility has helped Spotify maintain its growth and extend its lead, but much of its early success was built on telco partnerships that offered bundled or discounted access to its premium service. Apple has been more limited in its telco partnerships strategy. Until recently its only active deal was with Australian operator Telstra. This deal dates back to a relationship with Mog which was acquired by Beats Music and the partnership continued following Apple’s acquisition of the equipment maker and music service. Apple recently launched a high profile partnership with leading UK mobile operator EE, a sign that telco deals still play an important role for music services. The EE partnership sees all new and upgrading mobile contract customers, across both iPhone and Android devices, gain six months free access to Apple Music. At the end of the trial the £9.99 per month subscription is added to the customer’s monthly bill. 

 

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