Apple Inc. (NASDAQ:AAPL)‘s recent foray into the music streaming business marks a broader entry into a lucrative segment of the technology space: advertising.
Apple Inc. (NASDAQ:AAPL)’s massive user-base will generate high levels of traffic, which in turn makes for a strong value proposition for advertisers. The company’s freemium model for the iTunes Radio service is a solid move from the company’s standpoint to earn incremental revenue from its massive fan base, through both subscription revenue and targeted advertising.
iTunes Radio is great strategic move
The ad-supported radio business is a great strategic move because it will enable the company to monetize its users. Apple Inc. (NASDAQ:AAPL) disclosed that the number of active iTunes accountholders with credit card info in place exceeded 575 million. This large increase in iTunes users only adds to widely held investor expectations that Apple will unveil a mobile payments service, which will likely compete with PayPal or Square.
Apple’s free internet radio service will play music from more than 200 stations, along with music from iTunes. Just like Pandora Media Inc (NYSE:P), Apple’s service will focus on personalizing the user experience. Apple Inc. (NASDAQ:AAPL) will be able to pull data from the user’s previous audio lists and purchase patterns on iTunes to play songs users like. And Apple will throw in the radio ads, and likely a lot of display ads, to keep the service free of charge. Users can also opt for an ad-free experience by subscribing to Apple’s existing iTunes Match service for $24.99 annually.
iTunes Radio will help Apple Inc. (NASDAQ:AAPL) to drive more users to purchase a la carte music on iTunes, even as the company earns subscription revenues and ramps up its advertising revenues. This also represents a strong move by Apple to utilize reams of user data it already holds to earn additional revenue, while enabling musicians and artists to generate more sales of their own.
A crowded space puts pressure on smaller players
Apple Inc. (NASDAQ:AAPL)’s decision to move into this space comes only a few days after Google Inc (NASDAQ:GOOG)unveiled a music subscription offering that will allow users to listen to music for $9.99 a month. And Apple’s decision to monetize using mobile advertising is right in Google Inc (NASDAQ:GOOG)‘s ballpark, too.
Google is the undoubted leader of advertising in desktop and mobile, and Apple Inc. (NASDAQ:AAPL)’s move increases its competition with Google andfor mobile advertising dollars. Apple’s shift into a freemium online radio service is very bad news for the already struggling, Pandora and Spotify as well.
Even though Pandora Media Inc (NYSE:P) did manage to get more than 200 million registered users, the company’s bottom line is still deeply in the red. Out of the roughly 70 million monthly active users of Pandora, only 2.5 million pay a monthly subscription fee of $3.99 or an annual fee of $36 to avoid display and audio ads. However, the bad news for Pandora Media Inc (NYSE:P) is that a large number of its users are existing iOS users, and many of them will likely migrate to iTunes Radio.
Apple Inc. (NASDAQ:AAPL)’s iTunes user base of more than 575 million is much bigger than Pandora’s total audience. And Apple is expected to hand out 10% of ad revenue to the copyright owners, much higher than Pandora Media Inc (NYSE:P)’s rate of roughly 4%.
A much smaller player in the space, Spotify only has 24 million users. Google Inc (NASDAQ:GOOG)’s new All-Access Music service will directly compete with Apple for subscription revenue as well. As a result, investors should expect the music streaming business to consolidate in the future.
Earnings potential of this business
Out of the 575 million registered iTunes users, approximately 300 million iTunes users are in the cloud actively. If 100 million of those users start listening to iRadio, the company topples Pandora’s monthly active user base of roughly 70 million users. And if only 5% of those early iRadio adopters start out by paying for iTunes Match, Apple Inc. (NASDAQ:AAPL) will be earning in the region of $125 million annually from subscriptions alone. And Apple will be easily be able to monetize the rest of its radio crowd with at least $10 per user on an annual basis (which is a conservative estimate), primarily because audio ads command a much higher cost per thousand impressions (CPMs) relative to other forms of display ads.
After paying out revenue share agreements with copyright holders, Apple Inc. (NASDAQ:AAPL) can easily earn more than $1 billion annually in incremental revenue from this iRadio business. And that doesn’t even take into account the additional a-la-carte music sales this service will drive to iTunes.
In its most recent quarter, Pandora Media Inc (NYSE:P) earned ~84% of its total revenues from advertising sales. Apple’s monetization from this iRadio service will likely follow a similar trajectory because the company will generate most of its revenues from radio and banner ads.
Broader move towards advertising next?
Even though advertising is a non-core business for Apple, it has the potential to develop into a much bigger portion in the long-run. Apple Inc. (NASDAQ:AAPL) has a lot of user information which will enable the company to earn a more for its ads compared to Pandora, due to much more enhanced targeting capabilities.
The struggling Pandora Media Inc (NYSE:P) is expected to earn around $372 million in mobile ad revenue, behind ad giants Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB), according to eMarketer. However, Apple can easily overtake Pandora in that ranking and be a much bigger player in advertising. Even though advertising is not a core business for Apple, iAds can expect to generate a decent amount of revenues for Apple Inc. (NASDAQ:AAPL) in the future.
Apple’s iAd Workbench is enabling developers to acquire users based by placing ads on iOS similar to Google Inc (NASDAQ:GOOG)’s AdWords. While Apple’s revenues from advertising are likely to remain small in the near term, the company might be able to generate more meaningful amounts in the longer term.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG).
The article Can Advertising Drive Apple’s Revenues? originally appeared on Fool.com.
Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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