U.S. Markets closed

Music industry watches closely as Apple Music free trials expire

Aaron Pressman

Apple Music hits its three month anniversary next week and, to paraphrase an old Warren Buffett saying, we're about to see how many people are listening naked when the tide goes out.

Apple's (AAPL) streaming music service costs $10 a month and does not have a free-with-advertising tier, a popular option on Spotify, Deezer and many other rivals. Apple's service kicked off on June 30 with a 90 day free trial for anyone who signed up. But those early adopters will have to decide whether to begin paying for the service September 30.

Early reviews
Early reviews were tepid, at best, and the various user numbers bandied about are subject to conflicting interpretations. Some analysts fear Apple Music will fall victim to the same neglect that hurt its Pandora (P) clone iTunes Radio in 2012 and the infamous Ping social music service in 2010.

At the beginning of August, after slightly more than a month on the market, Apple said 11 million people worldwide had signed up for a free trial. Apple hasn't updated that disclosure yet, though the New York Post reported on Monday that 15 million have signed up so far, citing anonymous sources. Despite Apple including Apple Music as a default app and backing the service with several advertising campaigns, the reported user total represents a fraction of an estimated 400 million to 500 million iPhone users globally.

Battling a streaming slowdown
The music industry has been desperate for Apple's premium subscription service to take off, encouraging more people to pay for music again and offsetting plummeting sales of digital and physical songs. Without Apple, the streaming music wave is already slowing. The number of U.S. paid subscribers increased only 2% to 8.1 million in the first six months of this year compared to 2014, according to figures released by the Recording Industry of America on Monday. Streaming revenue was up 23% to $1.03 billion. Apple Music opened on the last day of the period.

Will they or won't they?
There's also the question of how many current users will drop the service as the bills start coming due. In mid-August, Apple said 79% of people who signed up were still active users. That was after a survey by Musicwatch said that almost half of people who tried Apple Music had already quit.

Whichever number you believe, given the low number of people who signed up for the free trial, it doesn't seem like Apple is going to approach Spotify's 20 million or more paid subscribers and 75 million total users (including the free service). Apple, of course, won't have a free tier for current users after the 3-month trial ends.

The great hope
"People have focused on these surveys about how many people will continue, how many turned off auto-billing, but that all sort of misses the point," says Russ Crupnick, managing partner at MusicWatch. "the big story is how can Apple get more people to try it who are not yet users."

"The great hope," adds Geoff Mayfield, a consultant who used to work for Universal Music Group, "is that the success of Apple Music doesn't come at the expense of Spotify and that it will be additive rather than just moving people from one paying subscription to another."

While the music industry awaits further developments from Apple, they've already gotten a bit of bad news on another streaming music front.

The industry was seeking a huge increase in the rights fees webcasters like Pandora pay for each song play. A government body, the Copyright Royalty Board, will set the rates in a decision expected in December.

But on Monday, a related agency, the Register of Copyrights, said that a private deal Pandora has already hashed out with thousands of small, indy labels can be used as part of the overall decision by the CRB. The rates in that deal are close to what Pandora was seeking and nowhere near what the industry sought.

Finally, the French streaming service Deezer, which has about 6 million paying subscribers, is planning to go public. That will give it much more capital to expand aggressively and convince even more music fans to stop buying songs and start streaming.

And Deezer's model isn't necessarily helping the music industry. Over three-quarters of subscribers get the service bundled with their mobile phone service bill, according to the company's IPO filing. That feeds the perception that music should be free, a view that consumers love but record labels despise. Only 1.5 million of the users who get the free bundle have even used it in the past month. And in the United States, Deezer has partnered with smaller carrier, like Cricket wireless.

The music industry has placed its hope in Apple's no-free model. Whether that bet will ever pay off remains debatable.