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Apple's iTunes Can Be a Big Growth Driver That Investors Shouldn't Miss

June 26, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

Apple (AAPL) has recently received a lot of flak. Its map application was criticized and iPhone sales have almost become saturated.However, in spite of this boredom and fatigue with all things Apple, there are still clear signs ofwhere Apple might be headed, at least in one segment.

Apple's iTunes is 10 years old and is the most successful music retailer in the world. The iTunes music store generated $4.1 billion of revenue in the recent quarter, and the numbers will not relent anytime in the near future.

iTunes has been used by millions of people to download billions of songs. The numbers arerather staggering. In the last 10 years, 25 billion songs have been sold, 35 million songs exist inits catalog, and the service is available in 119 countries.

Moreover, the iTunes music store is not a major source of Apple's revenue, and accounts foronly 9% of the top line. Its major business comes from iPhones and iPads, for a total of 72% ofits revenue.

Obviously, Apple investors and observers are worried that the company might have reached a stagnation point from which it might be difficult to recover. While these are genuine concerns, Apple's future may well rest in the halls of the recording industry more than it does on design floors.

People still prefer purchasing music to listen offline

The iTunes music store has only continued to expand despite the growth of YouTube andstreaming services like Pandora Media. Though on-demand video and audio streaming have become increasingly popular, people still continue to purchase music on the iTunes music store, suggesting that there is a clear preference for listening to music offline.There are several reasons why people prefer to listen to music offline.

Internet connections are not reliable across the world, and 3G/4G connections can simply be too expensive for most people to afford. Moreover, even when fast Internet connections are available for a relatively affordable price, the convenience of listening to music offline rests in device portability. Not every device is Internet enabled, and purchasing music files can solve that problem easily.

Apple may begin a radio streaming service

Moreover, Apple has been rumored to be starting a radio-streaming service similar to Spotify orPandora. Considering how important radio streaming has become to most people, Apple willcertainly want its existing iTunes music users to pay a subscription fee so that they can listen tomusic on demand. It's unclear when and how this service will be launched, but most people whoare familiar with Apple do believe that such a streaming service is in the offing.

There are genuine concerns that such a radio streaming service may cannibalize Apple’s iTunes music store, but such fears are unfounded. People who want to listen to music offline will nonetheless continue to purchase music on the music store and those who have access to unlimited and high-speed data plans will go ahead and pay a premium subscription fee.

Apple’s competitors in video and audio streaming

Google'shugely popular YouTube is no longer just a video-viewing service,but a media juggernaut that generates more money for the company than many of its other services. However, what we should notice is that Google makes money fromadvertisements rather than actual music or subscription sales.

Apple will not want to force advertisements on its users and will charge money in order to sustaina business model. Google, on the other hand, has not been successful in either selling music orin a streaming service, though the company has tried quite a bit at both.

But as YouTube passes the milestone of 1 billion monthly-unique views, Google could very well be the only company right now that could possibly give subscription sales versus an ad-based model a genuine try. All the ingredients are there; the size of YouTube's music audience is not only huge, but it's also growing at an unprecedented rate. This therefore presents an opportunity too good for Google and music-label owners to pass up.

Pandora, the service from which Apple may model its radio-streaming service, is fully available only in three countries: the United States, Australia and New Zealand. The company is also the custodian of the Music Genome Project, which tries to map music genres and styles across the world.

Though it's immensely popular in the above mentioned regions, it's not internationally available. Italso reported a $35 million net loss in the most recent fiscal year, which reduced investorconfidence in the company.

Apple will certainly be able to offer a better service than Pandora internationally as its iTunesmusic store is already available in 119 countries. This makes it easier for Apple to acquiresubscription rights from recording companies, which is what stops Pandora from offering itsservices internationally.

The bottom line

Apple may have reached a point of saturation when it comes to its devices. Its iPhones andiPads may not be selling as exceptionally as they did before. However, the company has a greatfuture in its music business. If Apple combines its iTunes music store with a premium radio-streaming service, it will stand to make more money than it does from iTunes alone.


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