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
107 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
107 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
107 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
107 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
107 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
107 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

iPhone 14 Pro Lineup Feature Purple

Apple Planning to Hold iPhone 14 Event on September 7

Wednesday August 17, 2022 9:51 am PDT by
Apple is aiming to hold its first fall event on Wednesday, September 7, reports Bloomberg's Mark Gurman. The event will focus on the iPhone 14 models and the Apple Watch Series 8. The standard iPhone 14 models are expected to get few changes, but the iPhone 14 Pro models will include updated camera technology, the removal of the notch in favor of a pill-shaped and hole-punch cutout, an A16...
iOS 15

Apple Releases iOS 15.6.1 and iPadOS 15.6.1 With Bug Fixes

Wednesday August 17, 2022 9:50 am PDT by
Apple today released iOS and iPadOS 15.6.1, minor updates to the iOS and iPadOS 15 operating systems initially released in September 2021. iOS 15.6.1 and iPadOS 15.6.1 come a month after Apple released iOS 15.6 and iPadOS 15.6 with new Live Sports features and bug fixes. The iOS 15.6.1 and iPadOS 15.6.1 updates can be downloaded for free and the software is available on all eligible devices...
10th Generation iPad Render

10th-Generation iPad With Major Design Changes Reportedly in Production Ahead of September Launch

Monday August 15, 2022 8:02 pm PDT by
Apple's rumored 10th-generation iPad is currently in production and will feature "major" design changes, according to a report from Taiwanese website DigiTimes. A mockup of the potential 10th-generation iPad design by Renders By Shailesh The report did not provide any specific details about the 10th-generation iPad's new design, but rumors suggest the device will feature a larger 10.5-inch...
airpods pro black background

AirPods Pro 2: Five New Features and Improvements to Expect

Sunday August 14, 2022 3:28 pm PDT by
Apple's second-generation AirPods Pro are finally nearing launch, with a release expected later this year. If you are considering upgrading to the new AirPods Pro once they are released, keep reading for a list of five new features to expect. In addition to all-new features, the second-generation AirPods Pro will likely adopt some features added to the standard AirPods last year. H2 Chip ...
Apple Watch Series 3 v 8 1

Apple Watch Series 3 vs. Apple Watch Series 8: 20 Major New Features and Changes for Customers Upgrading

Tuesday August 16, 2022 6:52 am PDT by
It's crazy to think about, but next month will mark five years since Apple announced the Apple Watch Series 3. Despite being a severely antiquated smartwatch, the Series 3 has remained at the bottom of Apple's lineup for $199. Suppose you're still holding on to your Apple Watch Series 3. In that case, this article will list all the major new features and changes you'll get if you decide to...
ios 16 lock screen feature2

Apple Seeds Sixth Betas of iOS 16 and iPadOS 16 to Developers [Update: Public Beta Available]

Monday August 15, 2022 10:04 am PDT by
Apple today seeded the sixth betas of upcoming iOS 16 and iPadOS 16 updates to developers for testing purposes, with the updates coming a week after Apple released the fifth developer betas. Registered developers can download the iOS and iPadOS 16 profiles from the Apple Developer Center, and once installed, the betas will be available over the air. iOS 16 introduces a revamped Lock...