No, Apple Music isn't primarily meant to sell more Apple hardware

Analyst Gene Munster suggests that Apple Music is all about selling more devices. That makes no sense. Instead, look for Apple to recoup its $3 billion Beats investment in short order.
Written by Kevin Tofel, Contributor

Poor Gene Munster. After years of expecting Apple to get into the television market, the Piper Jaffray analyst has a new drum to beat.

This time it has to do with the new Apple Music service that Apple launched earlier this week. In a research note pointed out by CNET, Munster says the Apple Music initiative isn't about the subscription revenue but instead is meant to sell more Apple hardware.

I find that as believable as seeing a new 70-inch 4k TV with an Apple logo on it at my local Best Buy this weekend. Meaning: I don't buy it at all.

For starters, Apple Music isn't at all exclusive to Apple computers, smartphones and tablets. At launch, it supported those as well as Windows PCs. That more than doubles the market for Apple Music subscribers thanks to roughly 1.3 billion PCs in use.

Oh, and don't forget that Apple Music will support Android phones and tablets later this year, adding more than another billion subscriber opportunities.

Windows and Android support surely wasn't an afterthought to Apple. If it wants to compete against Spotify, Rdio, and other similar services, it has to offer at least what they do, including cross-platform support. It's simply counter-intuitive to suggest that a cross-platform service can lead to sales of hardware specific to a single platform.

Put another way: A Windows PC or Android user wouldn't switch to a Mac or an iPhone for Apple Music. They don't need to.


That said, let's take a look at the revenues that Munster expects Apple Music to generate because, in my mind, that is the reason for Apple Music to exist.

Munster suggests that Apple Music will generate $1.8 billion in 2016 for the company, assuming 15 million subscribers. While Munster thinks 15 million is optimistic, I think his subscriber base estimate is low, mainly because of the cross-platform opportunity and the generous family plan available. Be that as it may, I'll assume Munster is correct and go with the 15 million.

While I agree with Munster that $1.8 billion in annual revenue is a small sliver of Apple's current revenue stream, that's the wrong way to look at it. This is recurring revenue for a captive audience in a market that's growing.

So how much profit can Apple make here? Based on history and reports of negotiations with record labels, I think it's safe to say that Apple's profit margin is 30 percent for Apple Music subscriptions.

If that's correct, Apple's profit from the music service would be around $600 million in 2016; again based on Munster's revenue numbers. Even if the subscriber base is stagnant at 15 million users, Apple makes back its entire $3 billion Beats investment in five years. Grow the subscriber base over time and that payback period quickly accelerates.

Keep in mind that Apple is reportedly seeking 100 million subscribers for Apple Music. Getting half that number by 2020 would turn the annual Apple Music revenue stream into a $6 billion business line, which is twice what the company paid for Beats.

The subscription model makes far more sense to me than spending $3 billion just to sell more iOS devices. Apple waited until the streaming music market was viable and it plans to cash in with Apple Music on various devices around the world.

Editorial standards