Apple's Beats Music Deal Seen as Key to Bolstering Declining iTunes Revenue Momentum

Apple reportedly is close to inking a deal with Beats Electronics for $3 billion, an acquisition that Morgan Stanley analyst Katy Huberty believes is important if Apple wants to further monetize its 800 million iTunes user base and boost revenue in its increasingly important online services division.

Apple's online services segment, which includes iTunes, is often overlooked because it contributes so little to the company's overall revenue. But as Huberty points out in a recent message to investors, online services shouldn't be so casually tossed aside as the segment "is an underappreciated growth and margin lever for Apple." It may be small, but online services revenue is expected to grow and margins are predicted to increase in 2014, driven primarily by rising App Store revenue.

online_services_itunes_apps
Online services hold promise, but Apple needs to address iTunes, which is losing ground to rival music services. While App Store revenue is increasing, Huberty notes that iTunes revenue is falling as users turn to streaming services such as Pandora and Spotify to meet their music needs. This decline "raises concerns about Apple's ability to monetize the new base of emerging market customers," writes Huberty. According to Huberty's calculations, each iTunes account spent an average of $3.29 in the first quarter of this year, down 24% year-over-year.

declining-itunes
Huberty believes Apple could reverse this trend and improve monetization with the introduction of a subscription music service. One of the quickest ways to launch a subscription music service under the iTunes umbrella would be to acquire an existing service, something Apple appears to be doing with Beats Electronics and its Beats Music service.

Press reports, including the Financial Times and Wall Street Journal, suggest Apple is considering the purchase of Beats Electronics, which would give Apple an accessories business focused on headphones and a music streaming service. Apple has not commented and we have no knowledge of any pending deals. However, a subscription music service -- whether organically built or acquired -- is a logical extension of iTunes.

Spotify, which is generally viewed as the leader in streaming music, has 10M paying subscribers or about 25 % of its over 40M active user base (MAU). If Apple charges $10 per month, same as Spotify, every 1% penetration of Apple's 800M user base, equates to $960M revenue annually, adding 8 pts of growth to online services and half a point to total company growth.

Apple's acquisition of Beats would bring not only a streaming music service, but also veteran music producer Jimmy Iovine and musician Dr. Dre to Apple. The pair are considered to be the "big prizes" of the acquisition and could help Apple negotiate favorable music deals for a streaming music service.

Looking beyond Beats, Huberty argues that Apple also could bolster its online services with the introduction of a mobile payments option, an area of opportunity recently acknowledged by CEO Tim Cook. The launch of the rumored iWatch also may contribute to Apple's online services as customers bolster App Store revenue by purchasing apps compatible with the new device.

Top Rated Comments

Benjamins Avatar
100 months ago
Why buy music from iTunes when I can stream whatever I want for a small monthly fee with Spotify?

How many songs do you buy a year. for 9.99 a month, to me it's cheaper to just buy what I want.
Score: 15 Votes (Like | Disagree)
Steve121178 Avatar
100 months ago
Why buy music from iTunes when I can stream whatever I want for a small monthly fee with Spotify?
Score: 15 Votes (Like | Disagree)
Rogifan Avatar
100 months ago
Isn't the issue that Apple is late to streaming music and are now having to spend $3B to catch up?
Score: 9 Votes (Like | Disagree)
musika Avatar
100 months ago
As a customer, I say "yay unlimited music!", but as a professional musician with music on iTunes and Spotify, I say "well, there goes my chance at paying rent with this stuff".
Score: 9 Votes (Like | Disagree)
jabingla2810 Avatar
100 months ago
How many songs do you buy a year. for 9.99 a month, to me it's cheaper to just buy what I want.

Songs?

I used to buy a couple albums a month.

With Spotify, not only do I get those albums for less a month, I also get to listen to anything else too.

If my friend recommends a band? I've got all their music.
If I hear a song I like on the radio? I've got all their music too.

The benefits of streaming services go far beyond any monetary savings.
Score: 7 Votes (Like | Disagree)
AbSoluTc Avatar
100 months ago
Why buy music from iTunes when I can stream whatever I want for a small monthly fee with Spotify?

Exactly this. I have Spotify and can stream and have offline tracks. Why buy music I listen to only for a few months over and over and over again when I can can pay a small price for EVERYTHING I could ever want?
Score: 6 Votes (Like | Disagree)

Popular Stories

Upcoming Products 2022 Feature

Gurman: Apple Preparing 'Widest Array of New Hardware Products in Its History' for Fall

Sunday January 23, 2022 10:32 am PST by
Apple is working on a number of new products that are set to launch this fall, and Bloomberg's Mark Gurman says that it will be "the widest array" of new devices that Apple has introduced in its history. In his latest "Power On" newsletter, Gurman explains that Apple is working on four new flagship iPhones (iPhone 14, iPhone 14 Max, iPhone 14 Pro, and iPhone 14 Pro Max), an updated low-end Ma...
macbook pro 14 16 2021

Three Months After Launch, Apple Still Struggling to Meet Demand for Redesigned 14-Inch and 16-Inch MacBook Pro

Monday January 24, 2022 7:12 am PST by
Three months after their launch, the 14-inch and 16-inch MacBook Pros continue to experience high demand and seemingly short supply, with shipping dates for both models stretching into multiple weeks in several of Apple's key markets. In the United States, the baseline 14-inch MacBook Pro with the M1 Pro chip is estimated to ship in three to four weeks, promising an arrival by at least...
General Dropbox Feature

macOS 12.3 Will Include Cloud Storage Changes Affecting Dropbox and OneDrive

Tuesday January 25, 2022 3:31 pm PST by
Dropbox today announced that users who update to macOS 12.3 once that software version becomes available may temporarily encounter issues with opening online-only files in some third-party apps on their Mac. In a support document and an email to customers, Dropbox said it is actively working on full support for online-only files on macOS 12.3 and will begin rolling out an updated version of...
Questionable Design Decisions

Apple's Most Questionable Design Decisions in Recent Memory

Sunday January 23, 2022 2:59 am PST by
Apple has always emphasized the depth of thought that goes into the design of its products. In the foreword to Designed by Apple in California, a photo book released by the company in 2016, Jony Ive explains how Apple strives "to define objects that appear effortless" and "so simple, coherent and inevitable that there could be no rational alternative." But every once in a while even Apple...
Apple Watch Red Yellow Green Feature 1

Apple Launches Black Unity Braided Solo Loop With 'Unity Lights' Watch Face

Wednesday January 26, 2022 6:05 am PST by
Apple today announced the Black Unity Braided Solo Loop for the Apple Watch, as well as a new downloadable watch face, to celebrate Black History Month. Following the launch of the limited edition Black Unity Apple Watch Series 6 and Sport Band in 2021, Apple today launched the Black Unity Braided Solo Loop as part of its celebrations for Black History Month this year.Apple is launching a...
att gigabit internet

AT&T Bringing $180/Month 5-Gigabit Internet to 70 Cities

Monday January 24, 2022 9:20 am PST by
AT&T today announced the launch of upgraded AT&T Fiber plans, which support speeds of up to 5 Gigabits for some customers. There are two separate plans, one "2 GIG" plan and one "5 GIG" plan, available to new and existing AT&T Fiber subscribers. According to AT&T, the new plans are available to nearly 5.2 million customers across 70 metro areas including Los Angeles, Atlanta, Chicago, San...
intel vs m1 max chip purple

Benchmarks Confirm Intel's Latest Core i9 Chip Outperforms Apple's M1 Max With Several Caveats

Wednesday January 26, 2022 8:56 am PST by
Benchmark results have started to surface for MSI's new GE76 Raider, one of the first laptops to be powered by Intel's new 12th-generation Core i9 processor. Intel previously said that its new high-end Core i9 processor is faster than Apple's M1 Max chip in the 16-inch MacBook Pro and, as noted by Macworld, early Geekbench 5 results do appear to confirm this claim, but there are several...
ios 15

Apple Releases iOS 15.3 and iPadOS 15.3 With Fix for Safari Bug That Leaks Browsing Activity

Wednesday January 26, 2022 10:00 am PST by
Apple today released iOS 15.3 and iPadOS 15.3, the third major updates to the iOS and iPadOS 15 operating systems that were released in September 2021. iOS and iPadOS 15.3 come almost two weeks after the release of iOS and iPadOS 15.2.1, minor bug fix updates. The iOS 15.3 and iPadOS 15.3 updates can be downloaded for free and the software is available on all eligible devices over-the-air in ...