SPOT Spotify Technology SA

By Anne Steele and Tripp Mickle 

Apple Music has surpassed Spotify Technology SA in paid U.S. subscriptions, according to people familiar with the matter, in a shift that escalates the music rivals' contest for listeners world-wide.

Apple Inc.'s streaming-music service has been adding subscribers in the world's biggest music market more rapidly than its Swedish rival -- a monthly growth rate of about 2.6% to 3%, compared with 1.5% to 2% for Spotify -- the people said.

Apple Music had more than 28 million subscribers in the U.S. as of February, compared with Spotify's 26 million, the people said. Neither service publicly breaks out regional subscriber counts, and those figures include only paying users, excluding those in trial offerings that the companies can count in their public subscriber disclosures. Including nonpaying listeners of its ad-supported tier, who generate a fraction of the revenue subscribers do, Spotify has more users overall in the U.S.

Apple was expected to reach its milestone more than six months ago, but Spotify intensified efforts to maintain its lead, expanding various promotions including a discounted subscription bundle with video-streaming service Hulu. More recently, the Swedish company filed an antitrust complaint in Europe claiming Apple abuses its control over the App Store to advantage the iPhone maker's service, something Apple denies.

Dow Jones & Co., publisher of The Wall Street Journal, has a commercial agreement to supply news through Apple services. Meanwhile, Spotify said in February that it agreed to buy podcaster Gimlet Media, with which The Wall Street Journal also has a content partnership.

Spotify remains far ahead of Apple globally. As of December, Spotify said it had 207 million active users around the world, 96 million of whom are paying subscribers or in a trial period leading to a subscription. The rest of Spotify's active users have opted for a free, ad-supported version of the service. Apple, which doesn't offer a free, ad-supported option, has more than 50 million paying subscribers.

The growth of Apple Music is one of the strongest validations yet of Apple's strategy to increase revenue by selling services across its devices -- a shift after decades of focusing on hardware sales. Last week, the technology company announced new subscription offerings for magazines, TV shows and videogames.

The push into subscriptions comes as Apple's bread-and-butter iPhone business struggles. In January, the company reported its first decline in sales and profits for the holiday period after iPhone sales fell 15% to $52 billion. Services, which includes streaming-music subscriptions, device insurance and mobile payments, blunted those declines, rising 19% to $10.88 billion in the period.

As streaming has become the most popular way people listen to music -- and the most lucrative source of growth for the recording industry -- subscriptions have become the most closely watched metric for the services competing to grow market share.

Apple Music is growing faster globally -- at a rate of about 2.4% to 2.8%, compared with Spotify's 2% to 2.3% -- and the gap is starting to close in other markets outside the U.S., according to the people familiar with the numbers.

Apple Music's momentum is particularly pronounced in the other large, English-speaking territories where iTunes, the company's music-download store, was popular and where iPhone usage is high.

Apple has used its devices' popularity to attract music-streaming users. The Apple Music app comes preloaded on iPhones and other Apple hardware. The company has a base of about 101 million active iPhones in the U.S., according to Strategy Analytics, a market research firm.

The service is also available on Android devices and has been installed about 40 million times world-wide from the Google Play store, according to the app-tracking firm Sensor Tower.

Offers tying subscriptions to mobile-phone services have also helped Apple make significant inroads. For example, the company this month joined with Verizon Communications Inc. to provide six months of Apple Music free to new and current customers.

It has used its marketing muscle to accelerate subscriptions, spending twice as much as Spotify on TV ads in the U.S. since 2016, with spots during National Football League games, awards shows and other big events, according to ad measurement firm iSpot.tv.

Spotify, which went public last year, has responded with offerings of its own, including an offer of free Hulu access with premium subscriptions. It also has extended discounts -- three months of its premium service for 99 cents -- that drive much of its subscriber growth, according to people familiar with the matter.

The streaming-music service is trying to counter Apple's distribution advantage of 1.4 billion active devices through an agreement struck in August with Samsung Electronics Co., making Spotify the default music service across the South Korean company's phones, TVs and speakers.

Apple Chief Executive Tim Cook, on a call with analysts last year, played down the competition among streaming-music providers, pointing instead to the potential size of the subscriber market.

Despite its growth, Apple's streaming-music business isn't expected to lift company profits. Costs associated with paying labels, publishers and artists means the service has a gross margin of roughly 15%, the lowest of any of Apple's services, according to RBC Capital Markets.

"From Apple's perspective, they're not looking at this business for overall dollars," said Ben Bajarin, an analyst with the technology firm Creative Strategies. "It's about making the value of their hardware go up."

Write to Anne Steele at Anne.Steele@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

April 05, 2019 11:06 ET (15:06 GMT)

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