Apple Music – Drop out question

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Spotify net adds is the key metric to watch.

• Apple has announced that it has signed up 11m trial members for its streaming music service of which 2m have opted for the $14.99 family package for up to 6 members.
• Whichever way one slices the data, these are excellent numbers and will certainly cause Spotify and its peers to pause for thought.
• Spotify is closing in on 100m users and it has taken it a long time to get there and so to rack up 11m in a matter of a month or so is superb performance.
• This is especially the case, as I do not believe that Apple has thrown a huge amount of marketing behind the launch of this service.
• However, the key factor will be how many of those 11m drop off at the end of the three months free trial period.
• History and other comparisons indicate that the vast majority (I would estimate 70%-80%) will drop-off at the end of the 3 month period.
• I think that Apple Music is a reasonable music service but its value beyond 30m tracks and a search box is not that clear.
• It has Beats 1 and some human curated playlists but Spotify offers much more to its users.
• Spotify has long understood that the value in its service is to understand its users and to offer them innovative music related services and best in class music discovery.
• Its addition adding Seed Scientific to its portfolio of data analysis assets, that already includes The Echo Nest, puts it in a much better position to differentiate its service going forward.
• Consequently, I am not worried that Spotify will lose paying or free users to Apple Music but its ability to attract new users is the real question mark.
• Apple’s huge advantage is the installed base of 338m users who simply have to push a button to begin the free trial and then do nothing to become paying subscribers.
• This is why Spotify needs to step up its marketing and help users realise how its service is better than Apple Music for the same price.
• The first step would be to re-run the year end 2014 campaign where users were offered three months of the paid service for $0.99.
• It is easy for existing users to understand how Spotify offers a better service but for new users it is not obvious at all.
• In these sorts of situations users will tend to go with a brand they know and it is not difficult to argue that the Apple’s brand is far stronger than Spotify’s.
• This represents a tricky period for Spotify and above all it must maintain the trajectory of subscriber growth despite Apple’s incursion into its market.
• The market with over 2bn smartphones users is big enough for multiple players in this space and so I think that Spotify will continue to grow.
• It is the pace of growth and how does that relate to expectations that will set the tone of the outlook for Spotify.