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  • KPB & Co Research

A few weeks ago we wrote about why we think that Apple (NASDQ: AAPL) has a long way to go before they can become a services oriented company. At the time we wrote the article, Apple had not seriously put together a competitive video streaming service, had just started out in payments through its Apple Pay product, and had begun to up the ante in the music streaming business. We theorized that for the company to become a solid service based company they would have to hurt all incumbents in the music streaming industry given the small size of the industry, dominate payments, and take over the video on demand industry. Today, we see signs that the battle in the music streaming industry is getting to a fever pitch level. Furthermore, Apple is about to put forward suite of on demand news service products for users at very competitive prices.

Apple Upping The Tempo on Music Streaming Rivals

With Spotify (NYSE:SPOT) launching a massive marketing campaign and making complaints to ani-trust authorities in the European Union, we get a behind the scenes look at how Apple has been using the leverage inherent in its install base to squeeze small players. Apple Music currently has 50 million paying subscribers, which is behind Spotify's 96 million, but is gaining ground quickly. In attempting to double its service revenues by 2021, Apple has been applying the "iSqueeze" strategy as follows:

High Incentive To Pay A 30% Surcharge For Using The Apple Store

Apple have been finding ways to HIGHLY incentivize music streaming companies to use the App Store as a platform for accepting payments. Apple being the owner of the App Store will be able to undercut market players or operate at larger margins. According to Spotify the company has eliminated payment system choice, and prohibited external links or buttons that connects to external payment methods. The company also limits the ability of streaming companies to use promotions on their platform such as using the word "Free" in screen shots, or "get 3 months now for 0.99 cents". They also band any external links that provide product information, or any call to action. In the case of Spotify Apple was able to charge 9.99 for its own music streaming service, while forcing Spotify to charge 12.99 per month.

Difficulties in Getting Access To All Apple System Tools Such As Siri

The company is also looking to gain a competitive edge in service quality by slowing down the pace at which its competitive can develop on it platform. Spotify claims that Apple has been making it difficult to from them use key apple services that would enhance user experience for iPhone owners. First, Apple does not allow Siri to play playlist from the Spotify app in Europe, second there was a huge delay in granting access for Spotify to develop applications for the Apple Watch. Third, according to Spotify, the company has been rejecting the Spotify App based on inconsistent and biased reasons. Fourth Apple launched the smart speaker series without support for Spotify. Shortly after Spotify announce their intention to purchase two podcast producers, Apple shuts down access to their API for the purpose of making podcast recommendations to users.

Where Will They Go From Here ?

We expect Apple to continue to put pressure on music streaming companies as it continues to expand its services business, but music streaming businesses also have leverage that they can use. First, these companies have strong brands and deep connections with their customers, which makes it difficult for apple to cut them out of the loop quickly. In the case of Spotify, they are already appealing to their end users.

As outlined in our previous article, music streaming companies such as Spotify and to a large extent Sound Cloud also have deep connections with content creators through tools that assist with creating and promoting songs, and managing artist calendar.s This also makes it challenging for Apple to cut them out of the supply chain totally without a similar platform to facilitate content production. The relationship between Apple and other Music streaming companies is likely to evolve in similar fashion as that between retailers who have their own private label brands, and food manufacturers who are looking for shelf space and proper product positioning.

Apple is Launching Subscription Based News Service

As 2019 unfolds, Apple will be rolling out a flat fee based news service that will allow iPhone users to consolidate all their news based subscriptions into one, instead of maintaining separate accounts for many news sources. The acquisition of texture gave the company the capability execute that kind of business model, and now there are talks of a 10 per month all you can read based platform that is already getting rave reviews online.

Apple Launching A Video On Demand Service, Maybe ?

There are rumours going around that Apple will also release a video subscription service on March 25. In our view, these are speculations and there is today little evidence that a premium video on demand service can be launched at a competitive price point. So far the content that Apple has commissioned is still tiny in comparison to Netflix's, Amazon's or even HBO's. So far they have bought the rights for Carpool Karaoke - which is currently available for free through Apple Music, commissioned the Planet of Apps - which is also available through Apple Music. They also spent US$1Bn to commission multiple shows last year, shows in the reality tv and drama space. This level of activity is significantly less than that of Amazon's and Netflix's who are spending close to US$4Bn and US$8Bn respectively, both of which already have a significant catalog of content in storage.

Apple is turning up the volume on the original content industry, and many players are beginning to feel the heat. However at this stage of the game, we see more pressure being placed on the music streaming industry than in other industries. This pressure in music streaming is expected as Apple has owned that industry since the creation of the iPod, and only began to gave up share since music streaming began to take shape. Apple has made aggressive moves in News by providing a platform for the easy distribution of content, but the jury is still out on whether that model is sustainable over the long term as news companies are facing a tough time staying afloat already, and there is the potential of making less money when using Apple's platform. Video on demand still seems to be a peripheral item for apple as the level of financial commitment has been small relative to those of its competitors.

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