Apple Needs To Make This Acquisition Before It’s Too Late

When iTunes was introduced to the masses by Steve Jobs on January 9, 2001, it forever altered course of the music industry.

Instead of having to buy entire albums, consumers could now purchase individual songs for a low price of $0.99.

And for the avid music fans who were tired of carrying around CD’s?  Apple introduced the revolutionary iPod which allowed consumers to have thousands of songs in the palm of their hand.

This business model of paying for single songs as opposed to entire albums is clearly resonating with consumers, as evidenced by iTunes reaching $6 billion in global revenue during 2011.

While that is some serious coin, the iTunes business model is currently under siege by a variety of different players.  In the fast paced technology world, you can never rest on your laurels because competitors are always thinking of new ways to disrupt markets.

The most interesting competitor that comes to mind is Spotify Inc, a music service that was launched in Sweden during 2006.  After long and protracted negotiations with record labels, the service is beginning to take off in the United States too.

Unlike the iTunes model where you have to pay for individual tracks, Spotify takes a completely different “freemium” approach.  The company makes money from advertising streams for free customers and also collects a $10.00 monthly subscription for members who opt to use the premium service.

To make a “big splash” in the United States market, Spotify signed an exclusive pact with social-networking leader Facebook.  Spotify allows Facebook users to share the songs they are listening to via the newsfeed, which definitely helped to propel the company into a mainstream music service with brand recognition.   Users can also share their playlists on the social network, which helps draw more potential customers into the service via social leverage.

Spotify is now tightly integrated into the Facebook platform.

The service is definitely gaining huge momentum in the United States and it has over 20,800,000 monthly users on Facebook according to the AppData, which tracks the popularity of Facebook applications.

Another killer feature of Spotify is the ability to stream music to a variety of different devices including: PC’s and Macs, iPods, iPads, and Android devices.  Being able to access the same music service on your PC, iPad, and smartphone is definitely is a gamechanger that is putting pressure on the antiquated iTunes model.

The new Spotify iPad app allows listeners to effortlessly stream music to their tablets.

Consumers have a variety of different devices and the ability to stream content to all of these devices is absolutely critical.

Currently, Spotify has over 3,000,000 paying subscribers and the company continues to grow their content library by striking up new deals with record labels.

Spotify almost sold to Google for $1 billion dollars in 2010, but the company recently raised more equity at a valuation of $4 billion.

The premium valuation underscores just how popular the service is becoming and how it threatens to completely alter the iTunes “ala carte” business model of selling content.

It was more than 11 years ago when Apple introduced the iTunes store, but even great businesses can be disrupted by innovative competitors.  Apple should know a thing or two about this because they are often the “disruptors” who seize existing markets and push out the incumbents.

No other streaming service has the potential and growth trajectory of Spotify right now.  Even though the valuation is steep right now, Spotify has the potential to be a $10B+ enterprise in the future.

If I were in CEO Tim Cook’s shoes, I would immediately consider making a competitive bid for Spotify.  Some might view the move as a defensive play, but I think it would just help diversify Apple’s ($AAPL)  iTunes store revenues.

Rather than selling content for strictly “ala carte”, Apple could offer a variety of different bundling options that allow you to purchase a monthly subscription or purchase songs individually.

The main thing is:  buying Spotify would make Apple the undisputed leader in the digital music industry and it would finally put Apple on the social map.  (Remember Ping?… yeah)

When you have $100B+ in the bank and no major acquisitions no the horizon, you can afford to make moves that insulate your business from potential threats.

As it stands right now, Spotify is quickly becoming a serious competitor to iTunes and this threat should be taken seriously.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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