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1 Analyst Thinks Apple Should Go the Wrong Way With Music Streaming

Apple Music interface on iPhones

The music industry loves Apple (NASDAQ: AAPL) . Not only did the Mac maker help fend off rampant piracy by revolutionizing digital distribution, Apple has long been a champion of the industry's broader economics. Apple Music is now one of the largest paid music-streaming services in the world, second only to Spotify. The biggest strategic difference between the two services is that Spotify offers a free, ad-supported service, while Apple does not.

With Spotify recently filing for its forthcoming direct listing, public scrutiny over the music-streaming industry is only going to intensify. One Wall Street analyst now thinks that Apple should go the wrong way with music streaming.

Apple Music interface on iPhones

Image source: Apple.

Should Apple Music have a free tier?

RBC Capital Markets analyst Amit Daryanani recently issued a research note (via Business Insider ) arguing that Apple should offer a free, ad-supported tier for Apple Music as well. That notion "represents an untapped opportunity for Apple," in Daryanani's view. Not only would a free tier serve as a customer acquisition channel, but Apple could garner copious amounts of user data to fine tune its content-discovery algorithms. (Note that last year's acquisition of Shazam was very likely predicated on content discovery.)

Doing so could also help Apple's position internationally, where some users in emerging markets may not be able to afford the service. Spotify is growing fastest in Latin America and its rest of world segment. While the company does not disclose a specific breakdown of free and paid users in those markets, it's safe to say that monthly active user (MAU) growth is probably being driven by the free tier.

Geographical Market Percentage of MAUs MAUs Growth (YOY)
Europe 37% 58 million 26%
North America 32% 51 million 23%
Latin America 21% 33 million 37%
Rest of world 10% 16 million 51%

Data source: Spotify F-1. YOY = Year over year.

The good news for Spotify is that many of these free users do end up subscribing eventually. "Our Ad-Supported Service serves as a funnel, driving more than 60% of our total gross added Premium Subscribers since we began tracking this data in February 2014," Spotify states in its F-1 Registration Statement.

Still, this would be the wrong move for Apple.

Apple is terrible at advertising

Just about every time Apple has ventured into advertising businesses, it has failed to make a dent (remember iAd?). The company also fundamentally loathes compromising user privacy, which is a necessary evil of every ad-supported business. iAd was created specifically to help developers monetize their content and apps, not Apple.

In many ways, Apple serves as one of few gatekeepers to the music industry, and the company doesn't take that responsibility lightly. Apple has to balance the economic interests of users and those of the record labels. Without a doubt, paid streaming is helping the U.S. music industry rebound after over a decade of malaise (data released by the Recording Industry Association of America last year makes that clear ).

It's also not as if Apple hadn't thought of a free tier to begin with.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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