Why Apple can become a bigger force in the digital music industry

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Apple will leverage the fast-growing music streaming market through its acquisition of Beats

In the previous part of this series, we discussed the details of Apple’s (AAPL) acquisition of Beats and how it will help Apple overcome the competitive threat of Pandora (P), Spotify, and other smaller players. We also discussed that although Apple has long been selling individual songs through its iTunes Store service, and last year started the iTunes Radio service, subscription streaming music service is what was missing from Apple’s portfolio. Beats Music will fill that gap for Apple. As the chart below shows, in 2013, physical music sales declined 13% and digital music sales declined 6%, while streaming music consumption increased 32%. No wonder Apple wanted to leverage the fast-growing music streaming market through its acquisition of Beats.

Streaming Music Growth

Apple has already made its iTunes service a seamless experience on iOS devices

The iShares Dow Jones US Technology ETF (IYW) and Technology Select Sector SPDR ETF (XLK) have about 20% allocations in Apple and have gained from the recent run-up in Apple’s stock. According to Comscore, and as the chart below shows, Apple is the leading player in the U.S. smartphone market, with about a 42% share. Samsung (SSNLF) has a market share of 27%, while LG, Motorola, and HTC each have market shares in the single digits. Apple has already made its iTunes Store and iTunes Radio a seamless experience for iOS users. iTunes Radio is pre-loaded on millions of iOS devices, while all Apple users also have existing iTunes accounts.

US Smartphone market

The halo effect can help Apple become a major force in digital music industry

Once a service is loaded on a device by default, users tend to adopt that service more often than not. Apple can integrate Beats’ subscription streaming music service on its devices and thereby make it more attractive for users to buy the iPhone or iPad. If Apple continues to make market share gains in the devices market, it will make its music service even more popular and vice versa. It’s also the halo effect that will help Apple. Once a user has bought an Apple device, there’s a tendency for that user to buy more Apple devices and services.

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