About a year ago, Apple announced its Spatial Audio format, which is similar to Dolby Atmos and Sony’s 3D audio. All three approaches offer a more immersive listening experience compared to surround sound, allowing artists to mix music so the sound comes from all around and from above. Similar to the adoption of stereo in the 1970s and surround sound in the early 2000s, 3D or Spatial Audio will be the next slow step forward in sound. Apple announced it will add Spatial Audio with support for Dolby Atmos to Apple Music starting in June.
What stood out in Apple’s announcement is the company’s unique ability to improve the value of an Apple Music subscription (new functionality at the same price), while at the same time promoting hardware sales for the most recent versions of AirPods and Beats, iPhone, iPad, and Mac. At its most basic level, it’s another example of the advantage of services and hardware integration.
Spatial Audio will take time to go mainstream
At launch, Apple Music expects to have “thousands” of spatial audio songs available from well-known artists. This of courses is a drop in the bucket compared to the 75m songs available on the service. While Apple will likely be first to market, Spotify is not far behind in offering a higher-quality tier. We estimate Apple Music currently has about 100m paying subscribers compared to Spotify’s reported 158m paid subs. Collectively, the 250m plus subscribers represent enough critical audience and pull with artists to eventually shepherd the format into mainstream adoption. The slope of the curve will be modest, likely taking 5-10 years for 3D audio to be the standard.
Apple Music approaching 100m subscribers
As mentioned, we estimate Apple Music is approaching 100m subscribers, which is up 25% over last year. This compares to Spotify paid subs growth of 21% in the March quarter. On average, we believe Apple gets paid about $7 per month, equating to $8.4B in annual revenue, or 13% of Services revenue and 2.5% of total revenue. While the addition of Spatial Audio will directly affect this portion of revenue, it will also indirectly affect AirPods, which we estimate account for 4% of Apple’s total revenue. The tight integration of hardware and services means the improvement of one improves the experience of the other. We believe this will be a well-timed tailwind for AirPods, which we estimate saw growth slow to 20% in the March quarter compared to 80% in the year-ago quarter.