Big news hit the music streaming industry when Apple (AAPL -3.05%) announced this week that it was raising the price of Apple Music in the United States. Previously, the premium music subscription was $9.99 per month, but it will be increased from $1 to $10.99. That comes with price hikes on other Apple subscription services like Apple TV+.
Competing audio streaming company Spotify (PLACE -3.17%) saw its stock jump 5% on the news, likely because investors grew more optimistic about the Swedish upstart’s competitive position in the music industry.
Here’s why an Apple Music price hike should be good news for Spotify’s future.
Price hikes allow Spotify to breathe
Apple Music’s standard subscription now costs $10.99 per month. Currently, in the US, Spotify charges $9.99 per month, the same price it launched over 10 years ago.
One of the bearish cases on Spotify is that its main competitor (Apple, Amazon, and YouTube) are just small subsidiaries of giant tech companies and they won’t care to raise music streaming prices even if the company loses money. This position could prevent Spotify from raising its prices. That seems to be changing with this recent announcement.
With inflation raging at 7% to 10% a year, there’s no reason to think Spotify couldn’t match Apple Music’s price increase (at least in the US) or go for it. an even higher monthly price in the years to come.
Apart from its standard plan, Spotify offers popular student and family plans. The student plan will not be affected by these developments, with Apple Music and Spotify charging $5 per month for people with college emails.
But the Spotify family plan should look more appealing to Apple Music subscribers at just $16 per month for up to six users, just $5 more than Apple Music. That could convince people to switch and allow Spotify to raise the price of its family plan, which it did in 2021 with no impact on customer churn.
Finally, Spotify is rumored to be planning an extra-premium tier called Spotify Platinum, which it recently asked users about. The subscription will cost more per month and, if launched, will include better audio quality, limited podcast ads and other features. Apple Music already offers this improved audio quality for all subscribers, so this price increase should make Spotify Platinum more competitive if/when it becomes available for purchase.
Overall, Apple Music’s price increase gives Spotify some breathing room that many investors didn’t realize it had, which should benefit the company going forward.
How Spotify Could Benefit Financially
So now we understand that Apple Music’s price increase will be good for Spotify, but let’s pull together some numbers and see what financial impact it might have.
Spotify currently has 195 million premium subscribers. We don’t know the mix of standard, student, and premium plans, but assume the company has the ability to raise prices by an average of $1 per month for all of its subscribers globally. That would be $12 per year per subscriber, which equates to $2.34 billion in annual revenue. This is significant, as in the last 12 months Spotify generated $12 billion in revenue.
Of course, Spotify won’t be raising the prices of all of its packages in all of its markets tomorrow. But I think this exercise shows how easily the company could grow revenue without adding new subscribers because of the built-in pricing power it has.
If you own Spotify stock, this Apple price hike should be music to your ears. With shares down 60% this year, now might be the time to buy some Spotify stock for your portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brett Schafer holds positions in Spotify Technology. The Motley Fool holds positions and recommends Amazon, Apple and Spotify Technology. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
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