Apple Music – Pandora’s box.

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I think Apple is going after radio more than streaming.

• Pandora reported bad Q3 15A results and guided weakly mostly as a result of losing users caused by the launch of Apple Music.
• This further reinforces my view that the real target of Apple Music is radio rather than recorded music streaming.
• Q3 15A revenues / adj-EPS were $312m / $0.11 just short of consensus at $313m / $0.10 but it was in the subscriber figures and outlook for Q4 15E were the trouble really started.
• While the number of listeners increased 2% YoY, it fell by 1.6% QoQ to 78.1m which came as a huge shock to the market.
• Furthermore, Q4 15E revenue guidance was 7% light with $325m-$330m forecast compared to consensus at $352m.
• The real problem was the decline in subscriber numbers and the tacit admission that Apple Music has had an impact.
• This sent the shares down 35% on Friday 23^rd
• This, combined with RFM’s research leads me to believe that Apple is in fact chasing the opportunity in radio much more than in recorded music.
• As one music industry executive appropriately put it: “Apple has parked its tanks on Radio’s lawn”.
• When one looks at the numbers this becomes obvious.
• Despite grabbing all the headlines, the recorded music industry is currently worth around $16bn while radio advertising is worth around $44bn per year.
• Even though streaming has kicked the recorded music industry back to growth for the first time in many years, radio is a much riper plum to go after.
• Apple’s music streaming service is still only half-baked and has come in for much criticism (see here) but its radio station, Beats 1, has been well received.
• Furthermore, RFM research indicates that radio stations Beats 2,3,4 and 5 are in development and the plan there is have them advertising funded.
• In radio, Apple is competing against broadcast radio which is a much softer target than its much bigger and better rival in streaming.
• Furthermore, as the opportunity is 3x the size of recorded music and 30x the size of the streaming market, the scope for returns is much higher.
• This fits with RFM research which indicates that Spotify, Deezer and Tidal have yet to see any meaningful impact on their subscriber acquisition numbers from the launch of Apple Music.
• However, for Pandora and Sirius XM, this is an extremely worrying development.
• Pandora has attempted to brush this off as a one-time blip but it is at a massive disadvantage compared to Apple.
• Every iOS device with iOS 8.4 or better is now set up for Beats 1 and its descendants making it the default streaming radio station on over 400m devices.
• History has shown that being the default setting or option on a device confers a huge and often unsurmountable advantage (see here).
• Hence, I suspect that Pandora’s user numbers are not going to recover and over the next year or so may establish a downward trend.
• Pandora’s still has many more users, more experience and much more data to play with but it has to immediately step up and make its service much better than Apple’s.
• Failure to act immediately will result in Friday’s correction being just the beginning of a long and painful kiss goodnight.