Apple’s podcasting aspirations are murky. As a giant in distribution with a large, affluent customer base, the company oozes with potential. However, Apple has done little to realize it. Over the past two years Spotify has invested half a billion dollars in ad tech, content creators, production companies, and publishing platforms. Meanwhile, Apple has stood still.

Contours of the company’s plans emerged earlier this month when The Information reported that it was launching a subscription podcast service (the article is behind a paywall but Nick Quah has a good overview). While there’s no firm timeline, Apple is in discussions with content creators. To date, the company has nibbled around the edges of original content with Apple TV+ and podcasts like Apple News Today. A paid podcast subscription is another step in this direction.

The Power of Defaults

No one has cracked a subscription podcast business model yet. Should it try, Apple has a number of advantages.

Subscription businesses live and die by their ability to profitably acquire customers. While Luminary and Wondery have to acquire users from scratch, Apple has a juicy captive audience: an install base of 1.65 billion devices, including over 1 billion iPhones. This is a boon for discovery and distribution. Few businesses can match Apple’s organic reach.

Every month I errantly click on my Macbook’s Apple News icon at least once. Multiply that by a few hundred million Mac users and you’re talking about billions of free clicks per year. Fat fingers aside, Apple has an intentional toolkit for promoting its services. For example, it controls what apps come pre-installed on Apple devices. Consequently, its hardware comes loaded with Apple Music, Podcasts, and a kitchen sink of other Apple apps. Defaults matter and Apple controls the defaults. That’s powerful. This week Facebook CEO Mark Zuckerberg teed off against the company, saying that:

Another way that Apple spurs services adoption is by providing free trials with hardware purchases. Each quarter, Apple sells tens of millions of iPhones, creating an onramp. Apple TV+ has amassed over 30 million trials with this tactic, though it’s unclear how many have converted to paid subscriptions.

How Large Could Apple Podcasts+ Be?

Apple Podcasts+ could be big relative to the podcast industry, but small relative to Apple. In June 2019, Apple Music had 60 million subscribers. Today, that number is likely 75–80 million, assuming user growth similar to Spotify’s. In the third quarter of 2020, 22% of Spotify users listened to podcasts. Applying this penetration rate to Apple Music’s subscriber base yields 15–20 million potential Apple Podcasts+ subscribers. At $4.99 a month, a price consistent with Apple TV+, Luminary, and Wondery, this equates to roughly $1 billion in annual revenue. Here’s the math:

Sources: 9to5 Mac, Spotify subscribers pull further ahead of Apple Music, but on loss-making deals, October 29, 2020. Spotify Investor Relations, 3Q 2020 Earnings Release, October 29, 2020. Pricing from Apple TV+, Luminary monthly subscription, and Wondery+ monthly subscription as of January 30, 2021.

One billion dollars is a generous estimate. That’s because it’s based on Spotify’s podcast penetration which includes both paid (premium) and free (ad supported) users. Only a subset pays for the service. In the third quarter of 2020, 45% of Spotify’s monthly users paid for subscriptions. Applying this discount to the estimate above results in annual revenue between $460 million and $1 billion.

For comparison, the podcast advertising market is roughly $1 billion, but growing quickly. Half a billion dollars is large relative to the podcast industry, but minuscule compared to Apple. In the fourth quarter of 2020, the company sold $111 billion of hardware and services, equivalent to the GDP of Morocco. Over the past year, it sold over $30 billion in wearable devices; AirPod sales alone eclipsed $10 billion. This exceeds Spotify’s revenue of $7.6 billion for the year ending September 30, 2020. Podcasts are existential for Spotify, but a rounding error for Apple.

Apple One + Apple One = Three?

As Mark Zuckerberg bemoaned, services are increasingly important to Apple. That’s because recurring revenue and higher margins make them financially attractive. While Apple Podcasts+ won’t be an AirPod sized business, it doesn’t need to be. Apple’s primary business is selling iPhones. Macs, iPads, wearables, and services play a supporting role, locking customers into Apple’s ecosystem. Podcasts+ deepens the company’s services offering, making its hardware stickier.

On October 30, 2020, the company launched Apple One, a bundle combining Apple Music, Apple TV+, iCloud storage, and other Apple services for a discounted price.

Source: Apple One. Pricing as of January 30, 2020.

Done well, bundles attract customers that wouldn’t purchase the products individually, increasing revenue. In his excellent post on bundling, Profitwell strategist Rob Litterst notes that Apple One’s current pricing isn’t compelling. To be valuable, a user needs to want Apple Music, iCloud storage, and at least one other Apple service. That’s a tall order.

Source: Good Better Best, Inside Shishir Mehrotra’s Bundling Toolkit, December 20, 2020.

Against Apple’s GDP-size scale, subscription podcasts will be immaterial as a standalone product. However, it makes sense in the context of Apple’s broader strategy. Adding Apple Podcasts+ to Apple One without increasing the price would make the bundle more compelling, driving subscriptions and higher retention. It provides one more reason for customers to stay within Apple’s ecosystem. Sorry, Mark.

Disclosure: The author owns shares in Apple.

Want More on Podcasting?

For more on podcasting from Below the Line please see:

Originally published at https://kjlabuz.substack.com.

Finance at Indeed. Previously finance at Etsy and internet equity research at Deutsche Bank. Find me @kjlabuz.

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