THE BLOG

Apple vs. Spotify: The Battle is on for the New User Market

07/08/2015 14:22 BST | Updated 05/08/2016 10:59 BST

Mark Hawtin and Amanda Lyons, GAM Tech Team

Streaming marks the latest shift in the way the music industry delivers content to fans. Over the past 15 years physical CD sales have fallen out of favour to digital downloads, and now online streaming is fast gathering pace as the listening medium of choice. You can get unlimited streaming for USD 9.99 per month (or for free supported by ads) - the same price as 10 downloads. This proposition has helped Spotify reach over 60 million users with around a third paying to subscribe. Subscription-based models have also led the fight against piracy (one of the main reasons for the decline in revenues). In Norway, music piracy fell over 80% from 2008 to 2012 (1.2bn downloads to 210m), mainly attributed to the growth of Spotify.

On paper Apple Music and Spotify appear identical. Both offer over 30 million songs, the ability to create playlists, radio functionality based on a song choice, offline listening, curated playlists based on mood, and music suggestions linked to your listening habits. However, the user experience is quite different.

Getting going with Apple Music

The Apple Music app is populated with relevant content from the start. Although aesthetics are not a primary concern, Apple Music is a pleasure to look at. The light background peppered with album covers of music Apple thinks you will like to listen to contrasts to Spotify's predominantly black screen.

Radio is another area where Apple Music wins hands down. It's probably fair to say that radio is not really a focus area for Spotify. Their purchase of Echo Nest (a music intelligence and data platform) last year improved the offering, but has been used to drive intelligence throughout the platform rather than that one area.

The 'Connect' tab is unique to Apple Music. This section is for artists to engage with fans, like an Instagram for music. Artists can post messages, photos or information about music or show dates; fans can then like, share or comment. Artists will likely use the platform to increase ticket sales and merchandising, as well as build their fan base. This is not going to pull any user away from Spotify but could be a big pull for an artist, especially considering touring and merchandise accounted for 45% of artists' revenue last year.

The data commodity

Data is a precious asset and music consumption over the cloud eats away at your allowance quickly. Offline listening is a great solution to this problem (and is also handy if you are on a flight or on the underground). Although both Apple and Spotify offer the ability to listen offline, it is not a seamless experience on Apple. Music has always been a social experience and Spotify embraces this idea; it is built into its core. All playlists are shared with other Spotify users, unless they are made private. Apple Music allows playlists to be shared on a one-to-one basis but does not give the functionality to search for playlists curated by other users.

Spotify's offering is more flexible than Apple Music and more appealing for the consumer who is very price conscious, with the exception for large families were discounts apply, particularly those already embedded in the Apple ecosystem.

The verdict

Apple Music is better for users who want a 'lean back' experience where new music is fed to you, while Spotify wins for those who want to 'lean in'.

Apple Music is not nearly as intuitive as Spotify and is more complicated to use, which could prove off-putting for the general consumer. We do not anticipate many Spotify users shifting to Apple despite 50% of Spotify users also using iTunes. The real battle is who wins the new users - Apple has a head start with approximately 800m iTunes accounts already connected to a credit card, compared to Spotify's 60m. However, Spotify has proved stronger at converting its users to paying customers. Almost a third of Spotify users have paid for a music streaming service in June, compared to 22% of iTunes users. But Apple has very deep pockets and can afford for Music to run at a loss as it vies for market domination.

Investment view

From an investor standpoint, the problem for Apple shareholders is that even if Apple Music is a success it is unlikely to have much, if any, positive monetary impact. If Apple gained 150m paying subscribers, 2014 revenue would have been almost 10% higher, however gross profit margins would have been almost 2% lower. If Apple Music only managed to grow to the same size as Spotify, 60m users with around a third subscribing, revenue would have been less than 1% higher and gross margins would have decreased 0.01%. With a margin in the region of 20%, compared to 60%+ for iPhone, Apple Music is definitely not the next catalyst for a move in Apple's share price.