What is the Value of Apple Music’s Free Trial Period? [Updated]

[Update 1]
Apple’s Eddie Cue has stated that musicians will now be paid during the trial period of Apple Music.

Although Apple Music’s extended free trial period will cause pain early in its life, there will not be a significant impact on musicians’ revenue in the long-run, especially as Apple approaches their 100 million user target.

As usual there has been no shortage of controversy surrounding the decisions of the world’s most valuable company. This time the target is Apple’s newly announced music service which is simply called Apple Music. The service is a subscription music service that costs $9.99 a month for an individual account which gives the user access to a broad library of music that can be played commercial free by the user.

Users are able to sign up for a three month free trial and this is where the controversy arises. Apple’s deals with the music industry allow this trial period to be royalty free. Musicians have criticized this move as cutting off a potentially large source of revenue, even arguing that asking the artists for a trial period without royalties is like asking Apple for free iPhones.

So far there has been no attempt to quantify the effect or value of such an extensive free trial. Let’s endeavor that analysis here.

First Some Assumptions
As with any model the first thing we have to do is establish the background assumptions that will affect our results. That way we can understand where the analysis may fall short and where its strengths may be.1

Market Size – Apple has stated that they believe they can reach 100 million subscribers to the new service and we will take that as their target subscriber size. This is either an accurate assumption because Apple is best positioned to know how well their future product may perform or it is an inaccurate assumption because Apple is known to forecast future potential results very conservatively.

User Growth – User growth assumed is based off of recent trends with Spotify’s subscriber growth rate. Spotify grew at a rate of approximately 14 million subscribers per year over the early part of 2015. For Apple we will allow the total paid subscribers to follow a variant of a power function with increasingly strong growth that peaks and then tapers off as they approach 100 million subscribers.

We should note that Apple has the potential to grow much faster than Spotify because of the advantage Apple has due to its ability to preinstall Apple Music on all iOS devices and Macs. Apple also holds the edge in advertising ability. These two facts combine to make our growth assumptions more conservative than they likely need to be. This is not a problem because more aggressive growth actually benefits the musicians therefore making our results more conservative than they otherwise would be.

Conversion Rate – Our assumed conversion from free trial users to paying subscribers is 20%. This is not based off of any particular inside industry knowledge of subscription music conversion rates. This however is not as important to the analysis as one might think.

The conversion rate is unimportant if we make just one further assumption: the usage of Apple Music by users that convert to paid subscriptions is equal to the usage of users who do not convert to paid subscriptions. This is the case because it allows us to view in relative terms the amount of revenue artists forego by allowing a free trial with no royalties no matter the actual conversion rate. To make this clearer let’s use some hypothetical numbers. Assume that the average user that finds Apple Music worthwhile streams 500 songs a month and the average user that does not find Apple Music worthwhile only streams 125 songs a month. It takes four users that will not find Apple Music worthwhile to equal the usage of one user that will.

Timing of Payments – Payment to Apple for the streaming service is assumed to happen at the beginning of each quarter and covers the cost of the entire quarter. Payment to artists is assumed to happen immediately. Obviously both of these assumptions will not hold true in the real world, but their implications do not significantly alter the conclusions from this analysis.

The Analysis


In our hypothetical situation Apple will reach 100 million subscribers sometime toward the end of 2017. At that point in time, enough of the potential market would have already converted to music suscriptions that new subscriber growth will slow. Although not identical, the iTunes Music store saw a similar trajectory with its music sales.


Adding new subscribers will be directly related to the total number of free trial users and how many of those users then pay for the service. In the graphic above we can see that adding more subscribers means many more free trial users. At the peak Apple would have 100 million free trial users in a single quarter. It is this point in the graph that concerns artists. But, we cannot know how much revenue artists are foregoing in such a scenario until we add more context.


We can gain the context we need about the impact of the free trial by scaling the number of free trial users by the number of paid subscribers. Here we can see that quarterly free trial users fall below quarterly paid subscribers after March 2017 and drops rapidly after that point. But the value of any individual user is not always the same.

The value consumed by free trial users follows a similar trajectory as the percent of paid users did. The key difference is that paid users will undoubtedly be those users that use the service the most as described in the assumptions section above. If we analyze the first point on the chart to the upper right, we see that the value consumed by free trial users is equal to that of the paid users, therefore musicians are losing 50% of their revenue as a result of this split. As Apple adds more high value paid subscribers the actual value lost by the musicians falls. This trend will continue until the value lost from the free trial nears zero. It takes a year and a half for the value lost to fall below 25% and just two years for it to fall below 10%. When Apple reaches their goal of 100 million paid users then musicians are only losing 4.67% of the revenue to the free trial.

How much do musicians currently discount their music on average below full retail? That is really the number we need to compare to our value consumed by trial users.

There is another way we could look at the value consumed by free trial users. We know that Apple is a huge corporation and no one will lose any sleep 2 if Apple’s costs rise, but I think it is still instructive for us to view this from Apple’s perspective.

Streaming media is not free. Apple will not be paying royalties on the media they stream, however it is still costly to advertise Apple Music and maintain data centers, whether the cost be space, bandwidth, electricity, or server hardware. We can reinterpret the value consumed by free trial users as the percentage of streaming costs for which Apple is receiving no revenue.

Why Not Ads?
A counter-arguement to a free trial period with no royalties would be a free trial period with royalties supported by ads. I do not think Apple wants ads anywhere near the trial period. Apple has operated iTunes Radio, a mostly ad supported service, since 2013. Although this is just conjecture, I would not be surprised if their iTunes Radio data revealed just how much people hate ads.

Listen to two potential Apple pitches. Number One: “Hey, haven’t you loved your free trial of Apple Music? We bet you’ll love it so much that $9.99 will seem like a steal.” Number Two: “Hey, don’t you hate those ads interrupting your music all of the time? Pay us just $9.99 to stop annoying you.” Yeah, the first sales pitch is the better one.

The Apple Music extended free trial period does cost musicians revenue. But over the long run the revenue lost will be minimal.

We can be certain that Apple used this kind of analysis when they approached the music labels with the idea of such a lengthy free trial that paid no royalties. The faster Apple can reach their 100 million user mark the less revenue is lost by the music industry. We can also imagine that the music industry was enticed by the massively skilled and equally massively budgeted marketing team at Apple which will now be full force behind streaming music. I do not think we can overestimate this power. Spotify rose to its level of prominence without much advertising. Any advertising by Apple will also have to be matched by Spotify. What do we think Spotify aims to do with this most recent round of capital raising? My guess… advertise. That is a win-win for the music industry.

Now when we hear talk of Apple Music’s free trial we can have a better understanding for how it might actually impact the music industry.

But, in the end, the negative PR Apple has sustained from this no royalty trial period may not be worth the trouble.

  1. “‘We’? Is this guy using the royal we in a blog post?”
    What can I say? I’m a teacher by trade and I like to pretend the class/audience is following along at home. So, when I say ‘we’ I actually mean it!

  2. Except for maybe Apple’s investors.

What if iPhones were Apple Pay Terminals Too?

Apple Pay is being billed as a potentially industry changing initiative. 1 Nevertheless, in order for Apple Pay to become ubiquitous it must overcome challenges in two key areas. 2

Payment systems are based off of a two-sided relationship. On one side you have the person sending the payment and on the other side you have the person receiving the payment. So, the first challenge is to convince people to keep an item with them capable of sending the payment and the second challenge is convincing people to get an item capable of receiving the payment.

The first challenge is the easy one for Apple to overcome. People buy iPhones like hotcakes. Apple sold 10 million iPhone 6/6+ handsets during the opening weekend alone. Apple doesn’t have to convince you to carry a new Apple Pay dongle because it’s built into a device you already carry. The real challenge comes in having devices capable of receiving the payments in key locations. I separate those that receive payments into three main groups: virtual stores, large physical stores, and small physical stores.

Apple Pay attacks virtual stores indirectly by integrating with apps. I suspect that this will be sufficient in the beginning but look for Apple to eventually integrate Apple Pay directly into Safari to make using Apple Pay on the web a great experience.

Apple Pay must reach widespread adoption with large physical stores.3 I suspect this will not be too difficult for them to accomplish. Apple Pay works with industry standard contactless payment systems already seeing adoption across the world. One of Apple’s institutional strengths is negotiating contracts with large and powerful industries. Apple already has big retailers like Nike, Staples, Bloomingdales, and many more on board with the plan.4 And, oh by the way, in addition to getting major retailers on board Apple has partnered with major financial institutions.

I’m not trying to let Apple off the hook, but it looks to me like they will have reasonable, if not great, success with virtual stores and shopping at major retail chain type stores. However, Apple will not be able to make Apple Pay ubiquitous until they can infiltrate small physical stores. And to be clear, I am including individual people in this group. Many people have tried to revolutionize mobile payments that are made to small stores or individuals. Square immediately comes to mind. My wife uses Square to manage payments for her business. Overall the system works well and is user friendly, but it still has flaws. In order to swipe a card to have to have your dongle. And, guess what… people hate dongles!!! You could type the card number in, but as the person paying you run into the same security risks that confront the entire credit card industry.

What if Apple made an easy way to pay your friends back for lunch? What if Apple made an easy way to pay at smaller stores? What if the system was as easy as cash?

As I mentioned above, the challenge answering these questions exists because not everyone has an Apple Pay terminal with them all the time. But what if we did? What if the iPhone had the ability to send and receive Apple Pay payments? That would mean Apple did not just sell 10 million devices capable of sending a payment but 10 million devices capable of receiving a payment. That would be a stealthy way to make Apple Pay ubiquitous.

I do not know if the NFC implementation on the iPhone would even allow for it to send and receive payments. If it can’t receive payments right now then Apple is missing out on a huge opportunity to become the largest player mobile payments. If the iPhone can receive payments then the mobile payments market is Apple’s for the taking.

  1. I say “potentially” because, as with most things Apple, pundits can be very polarized about what Apple is doing.

  2. Although I will approach this from the viewpoint of Apple, the concepts I identify apply to all industry players.

  3. I use the term “large” loosely here. We could substitute in “chain” or “corporate” physical stores.

  4. I love you Publix but I am still pretty annoyed you have so far chosen to opt out of Apple Pay.

What is the Apple Watch’s secret?

Apple.com: Apple Watch Features

Now your inner circle is always nearby. Press the button next to the Digital Crown to access Friends, a place where you’ll see thumbnails of those you like to stay in touch with most. Tap one to send a message, make a call, or reach out in one of the new ways only Apple Watch makes possible.

The description reads, “Press the button next to the Digital Crown.” Apple must have a name for this button that is better than just a description of the button’s location. I wonder if the name of the button gives away something about the functionality of the watch that Apple is still keeping secret.

Untethering Apple Watch

Over the years Apple has cultivated a very powerful Halo Effect. The the Halo Effect works because you can get customers to experience one of your products, they enjoy your product, and they want to buy more of your products. Apple’s most famous halo products were the iPod and the iPhone. Unfortunately, I don’t think the Apple Watch1 has the same ability to be a halo product (yet). 2 And here’s why.

In order for a product to be a halo product you have to be able to buy it first. Famously, Steve Jobs was convinced to put iTunes on the Mac and PC. This made the iPod available to basically anyone. The iPod exploded because everyone could access a computer that worked with an iPod.

The iPhone is a halo product for Apple because it could be your first Apple product. Interestingly, over time it became apparent that something was holding the iPhone back. Something was preventing it from being an even better first Apple experience: tethering. You had to tether the iPhone to backup your device, sync, get software updates, or do any number of other activities. By construction this prevents anyone that does not own a computer from owning an iPhone. Apple recognized this and adapted. iCloud, for all of its problems, makes the iPhone the perfect halo product.3

The Apple Watch cannot be a halo product. The way it works is by being paired with an Apple device, so the watch becomes an accessory only. This will make rapid widespread adoption difficult. Understanding that the market of current iPhone owners is huge, Apple is limiting their market to their existing users.

I suspect the need to tether an Apple Watch will be temporary. As technology advances and becomes smaller and less power hungry, I hope to see Apple modify the Apple Watch through time so it can become a stand-alone device and the next great Apple halo product.4

  1. or Watch if you please

  2. To be clear, I am not saying the Apple Watch will be a failure. I think it will likely be very successful.

  3. I am not forgetting the iPad, but it follows the same conceptual arc as the iPhone.

  4. For more thoughts about the Apple Watch as a stand-alone device go here and here.

Scaling the new anti-inversion rules

bloomberg.com: Treasury Unveils Anti-Inversion Rules Against Tax Deals

The U.S. Treasury Department announced steps that will make it harder for U.S. companies to move their addresses outside the country to reduce their taxes, clamping down on the practice known as inversions.

I’m sure there will be a lot of virtual ink spilled over this story, but I can’t help but focus on this line from near the end of the article.

The congressional Joint Committee on Taxation has estimated that legislation to curb inversions would raise about $20 billion over the next decade.

According to our friends over at Wolfram|Alpha in 2013 the GDP of the US was $17.08 trillion and government expenditures were $3.746 trillion. So, the government spends about $118,785 per second… Raising $20 billion won’t even cover 2 days of government expenditures. In reality the impact is much smaller than that because the $20 billion will be raised over the next decade.

Educating a CEO

I read a very interesting article about CloudFlare’s new keyless SSL security system and this caught my eye.

Arstechnica.com: In-depth: How CloudFlare promises SSL security—without the key

The development of Keyless SSL began about two years ago, on the heels of a series of massive denial of service attacks against major financial institutions alleged to have been launched from Iran. “We got a series of fairly frantic calls from those banks saying they needed help with this problem,” Prince said. “We met with JP Morgan Chase, Goldman Sachs… pretty much everyone in that community. They described to us a challenge that put them between a rock and a hard place. They had spent billions on hardware in data center to control access to their network. But it didn’t matter—no matter how intelligent the boxes they bought were, they were falling over because the attacks were so large. There was no way spending more money on premium equipment could solve it.”

At the same time, the banks weren’t able to use existing content delivery networks and other cloud technology to protect themselves either because of the regulatory environment. “They said, ‘We can’t trust our SSL keys with a third party, because if they lose one of those keys, it’s an event we have to report to the Federal Reserve,’” Prince said. “Somebody has to explain to (JP Morgan Chase CEO) Jamie Dimon what an SSL key is, and then he has to call the Fed. It’s a [chief information security officer]’s worst nightmare.”

Organizations like banks depend so heavily on technology. How long will it be before the average CEO at the average company starts to have an in-depth knowledge of how common technologies like SSL work? I imagine we eventually will see a trend in non-technology firms where the path to become a CEO travels not just through CFO and COO, but through CIO and CTO as well.

Becoming Coca-Cola

I have watched every Apple product announcement and keynote address since 2006. Most of the time I am watching simply as a technology enthusiast waiting to see what’s next; however, overtime you get used to the normal rhythm of these events. Something was different about the event announcing the Watch and new iPhones. To understand how it was different let’s look at the anatomy of a new product launches.

The Pattern
1. Identify a market that is currently poorly served
2. Explain why current offerings are not good enough
3. Announce the new product
4. Explain why the product needs to exist 1
5. Compare and contrast the new product with existing poor offerings

Steve Jobs directly addressed Apple’s competitors and he made a case for Apple’s entry into a new market. Jobs announced Apple’s music player with slides like these:


Again, Jobs directly addressed Apple’s competitors and he made a case for Apple’s entry into a new market. Here Jobs even goes as far as mentioning specific models of competing smartphones.


The iPad was no different.

Tim Cook took a very different approach with the Watch. Throughout the announcement there would be no slide acknowledging the terrible state of the smart watch market, no matrix of the current inferior offerings, and no slide demonstrating just how terrible their competitors’ interface is.2 Apple did mention traditional watch makers. But, the tone showed much more respect for the mechanical wonders fine watches can be.

The evolution in Apple’s product launches shows they recognize that they are no longer an underdog. Apple is the big dog. Just as Coca-Cola never mentions Pepsi, Apple did not mention Samsung. Pepsi screams “we are better than Coke!” Samsung screams “we are better than Apple!” This may be an effective strategy for the number two vendor to follow but it can not be consistently deployed by the market leader.

I imagine, just as the Mac vs. PC commercials had to go away, so too will most direct mentions of their other competitors.

  1. The Watch announcement was surprisingly missing a solid answer here. I can think of a few reasons why it might need to exist but that should really be Apple’s job.

  2. I secretly wished they would put a slide up with one of these.

Waiting in a line

In the past I have been part of the crazies that line up on opening day to get the new iPhone. I did it for the iPhone 4. I did it for the iPhone 5. And, I even did it for the iPad 2. But this time it was going to be different. I decided that I would just get online and order one there hoping I would be able to get the phone delivered on day one.

There are a couple of things that I really enjoy about waiting in line for a new Apple product. There is an incredible amount of energy in the air as people anticipate their new purchase. I mean, you get to hang out with a few hundred other technology nerds. How could this ever be a bad thing? I have had great luck becoming friends, although temporary, with my neighbors in line. We have shared stories about how we use our iPhones, talk about the new features that excite us, and just shoot the breeze about other random things.

For me, buying an iPhone after waiting inline has been as important a part of the iPhone experience as using many of the iPhone’s actual features. When I decided to buy my new online I was a little sad that I would be missing this experience.

As it turns out there is a pretty good substitute for standing in a line for hours in the early morning: Twitter. The iPhone launched online at 3:00 AM Eastern time, but Twitter was flowing freely with people sharing their experiences trying to buy the iPhone. And just like in a normal line there was a lot of angst. Most launch day cell phone carriers and Apple could not handle the massive volume of people trying to buy an iPhone. And just like in a real line where you have no idea how many units the store will actually have, we waited anxiously to actually see the screen refresh allowing us to buy a phone.

So in Jimmy Fallon style, thank you Twitterverse for being just as crazy as I am when trying to order a phone at 3 in the morning.

The iPhone 6 and one-handed mode

Daring Fireball: Laugh It Up, Fuzzball

Brian X. Chen:

To deal with concerns that a bigger phone will make typing with one hand difficult (the current iPhone has a four-inch screen), some changes to the design of the iPhones’ user interface will allow people to type or use apps with just one hand; there will be a one-handed mode that can be switched on and off, two employees said.

I know what you’re thinking. You’re thinking, Oh, that can’t be. Samsung tried that and it was ridiculous. Haha, the New York Times got punked.

The thing is, I’m not laughing. You wanted Apple to make a 5.5-inch iPhone? This is what you get.

I think we have already been shown Apple’s one-handed mode. The below screen shots are from iOS 8. Both images show interface elements that require just one hand AND you do not need to lift your finger to get from one button to another; you simply slide your finger across the screen.

I think this feature is especially important when using larger phones with just one hand. Lifting your thumb off of the screen requires you to secure the device with your remaining four fingers; this is much harder with larger devices. But, being able to simply slide your thumb across the phone allows the user to maintain steadier control of a large device.

I seriously doubt Apple’s one-handed mode/features will just shrink the displayed area down like we saw with Samsung. I am willing to bet Apple will be moving more toward radial menus and moving the location of important buttons to the bottom half of the screen.