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Big news hit the music streaming industry when Apple (AAPL -1.49%) announced this week that it is raising the price of Apple Music in the United States. Formerly, the premium music subscription was $9.99 a month, but it will increase $1 to $10.99. This comes along with price hikes across other Apple subscription services like Apple TV+.
Competing audio streaming company Spotify (SPOT -2.56%) saw its stock jump 5% on the news, likely because investors became more bullish 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 business moving forward.
Apple Music’s standard subscription now costs $10.99 a month. Currently, in the United States, Spotify is charging $9.99 a month, the same price it launched at over 10 years ago.
One of the bear cases on Spotify is that its main competition (Apple, Amazon, and YouTube) are just small subsidiaries of giant technology companies and that they will not care about raising prices for music streaming even if the business is losing money. This stance could inhibit 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 United States) or go for an even higher monthly price in the coming years.
Outside its standard plan, Spotify has popular student and family plans. The student plan will not be affected by these developments, with both Apple Music and Spotify charging $5 a month for people with college emails.
But the Spotify family plan should look more attractive for Apple Music subscribers at just $16 a month for up to six users, only $5 more than Apple Music. This could convince people to switch as well as enable Spotify to raise the price of its family plan, which it did in 2021 with zero impact on customer churn.
Lastly, Spotify is rumored to be planning an extra-premium tier called Spotify Platinum, which it recently surveyed users about. The subscription is going to cost more per month and — if launched — will include better audio quality, limited advertisements on podcasts, 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 raising prices gives Spotify breathing room that many investors didn’t think it had, which should benefit the business in the future.
So we now understand that Apple Music raising prices will be good for Spotify, but let’s put some numbers together and see how much of an impact it could have financially.
Spotify currently has 195 million premium subscribers. We don’t know the mix of standard, student, and premium plans, but let’s assume that the company has the ability to raise prices by an average of $1 a month for all of its subscribers around the globe. That would be $12 a year per subscriber, which equates to $2.34 billion in annual revenue. This is meaningful, as over the past 12 months Spotify has generated $12 billion in revenue.
Of course, Spotify won’t raise prices on all its plans in all its markets tomorrow. But I think this exercise shows how easily the company could grow its revenue without adding any new subscribers due to the embedded pricing power it has at its disposal.
If you own Spotify stock, this Apple price hike should be music to your ears. With shares down 60% this year, now could be a good time to buy some shares of Spotify for your portfolio.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Spotify Technology. The Motley Fool has positions in and recommends Amazon, Apple, and Spotify Technology. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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