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Apple Inc.’s (AAPL) iPhone sales may not be shaping up as Wall Street had hoped, but its music streaming service is growing at a double-digit rate and is starting to close in on Spotify Technology SA (SPOT).
The Wall Street Journal, citing an internal email sent by the company last week, reported that Apple Music, its paid streaming music service now has more than 40 million subscribers. That’s up 11% from the paid subscriber count just two months ago. While Spotify is still the undisputed leader with a worldwide base of 73 million paid customers as of the end of the first quarter, Apple Music is narrowing the gap.
Even more important, Apple Music is becoming a major contributor to the Cupertino, California-based company’s services revenue. The Journal pointed to Macquarie Capital analyst Ben Schachter who is forecasting Apple Music to have 40% growth each year for the next three years. That would put that business on the path to be the fastest growing unit at the iPhone maker. When Apple reports fiscal second-quarter results on May 1, the Journal said it is expected to have service revenue of $8.3 billion, which would be up 18% year-over-year. (See also: Apple’s ‘Other’ Sales to Hit $22B in 2019: Analyst.)
Lower Music Margins
While Apple Music is expected to see strong growth, it comes with a catch. Unlike pricey iPhones that boost gross margins for the company, Apple Music isn’t that profitable, largely because of the royalties it pays to music labels and artists to have the right to stream the music. Macquarie’s Schachter said that business has gross margins of around 15%, which is lower than Spotify, and what it makes off of its app store. With the App Store, the analyst said it has gross margins around 90%, noted the Journal.
Recognizing the need to beef up its recurring revenue stream, Bloomberg reported this week that Apple will launch a paid subscription service centered around Texture, the magazine app company it recently purchased. (See also: Apple Enters Content Fray With Texture Purchase.)
Apple plans to integrate Texture into Apple News and roll out a subscription service. Users of Texture pay $9.99 a month to access more than 200 magazines. The service, along with an upgraded Apple News App is slated to launch next year. People familiar with the matter told Bloomberg that a cut of the subscription revenue will be paid to the magazine publishers that participate in the service.
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