Big news hit the music streaming industry when Apple (AAPL -3.05%) announced this week that it will raise the price of Apple Music in the United States. The premium music subscription used to be $9.99 per month, but it will increase from $1 to $10.99. This is accompanied by price increases on other Apple subscription services such as Apple TV+.
Rival audio streaming company Spotify (SPOT -3.17%) saw its shares jump 5% on the news, likely as investors became more optimistic about the advent’s competitive position swedish in the music industry.
Here’s why an Apple Music price hike should be good news for Spotify’s business.
The price hikes give Spotify some breathing room
The standard Apple Music subscription now costs $10.99 per month. In the US, Spotify currently charges $9.99 per month, the same price it launched over 10 years ago.
One of the positives for Spotify is that its main competition (Apple, Amazon and YouTube) are just small subsidiaries of giant tech companies, and they won’t mind raising music streaming prices even if the business is losing money. This position could prevent Spotify from raising its prices. That seems to be changing with this recent announcement.
With inflation at 7% to 10% a year, there’s no reason to think Spotify can’t match Apple Music’s price hike (at least in the US) or go for an even higher monthly price in the coming years.
Outside of its standard plan, Spotify has popular plans for students and families. The student plan will not be affected by these developments, with Apple Music and Spotify charging $5 per month for people with university emails.
But Spotify’s family plan should look more attractive to Apple Music subscribers at just $16 a month for up to six users, just $5 more than Apple Music. This could convince people to switch and allow Spotify to raise the price of its family plan, which it did in 2021 without impact on losing customers.
Finally, Spotify is rumored to be planning an extra premium tier called Spotify Platinum, which it recently polled users about. The subscription will cost more per month and, if launched, will include better audio quality, limited ads in podcasts and other features. Apple Music already offers this enhanced 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’s price hike gives Spotify some breathing room that many investors didn’t think it had, which should benefit the business going forward.
How Spotify could benefit financially
So now we understand that Apple Music’s price hike will be good for Spotify, but let’s crunch some numbers and see what financial impact it could have.
Spotify currently has 195 million premium subscribers. We don’t know the mix of standard, student, and premium plans, but we assume that the company has the ability to raise prices by an average of $1 per month for all of its subscribers worldwide. That would be $12 per year per subscriber, which equates to $2.34 billion in annual revenue. This is significant, as over the past 12 months Spotify has generated $12 billion in revenue.
Of course, Spotify won’t be raising the prices of all its plans in all its markets tomorrow. But I think this exercise shows how easily the company could increase its revenue without adding new subscribers because of the pricing power at its disposal.
If you own Spotify stock, this Apple price hike should be music to your ears. With the stock down 60% this year, now might be a good time to buy some Spotify stock 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 holds 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 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.