Apple Music maintains its current subscription prices while rivals, including Spotify, its biggest rival, hike prices.—musicinafrica.net
Apple Music Cuts Free Trial to One Month from Three
Apple Music has reduced the free trial period for new subscribers from three months to one month.—business-standard.com
Spotify Sets Long-Term Revenue Target
Spotify announced at its Investor Day that it aims to reach $100 billion in annual revenue over the next 10 years.—euronews.com
Questions
- Who are the main players in the U.S. music streaming market?
- What has been the observed pattern in Spotify’s pricing and Apple Music’s promotion over the last three years?
- Why has Spotify raised prices while Apple Music maintained low promotion?
- In what type of market do Spotify and Apple Music operate?
- What are the two broad categories of games in an oligopoly?
- What type of game is being played between Spotify and Apple Music?
- What is the outcome of this game?
1. Who are the main players in the U.S. music streaming market?
The U.S. streaming industry is dominated by a few large firms. As Figure 1 shows, Spotify is the market leader with a share of 37% followed by Apple Music (31.5%), Amazon Music (21.6%), YouTube (7.1%), and others (2.8%).
Figure 1 Market Shares in the U.S. Music Streaming Industry
2. What has been the observed pattern in Spotify’s pricing and Apple Music’s promotion over the last three years?
In June 2022, at its Investor Day, Spotify publicly stated that it would prioritize increasing revenue, a strategy generally associated with raising prices over time. Since then, Spotify has increased its subscription price three times: to $10.99 in June 2023, $11.99 in July 2024, and $12.99 in February 2026.
Apple has continued the low-promotion strategy it began in February 2022, when it reduced its free trial period from three months to one month. This low-promotion strategy may be a response to Spotify’s shift toward raising prices, which has reduced the need for aggressive promotional efforts.
3. Why has Spotify raised prices while Apple Music maintained low promotion?
Table 1 answers this question by presenting hypothetical payoffs, defined here as the revenues firms earn.
Spotify has two strategies: “Raise Price” and “Hold Price”. Apple Music has two strategies: “Low Promotion” (its current one-month free trial for individual premium subscribers) and “High Promotion” (a three-month free trial).
When Spotify raises its price and Apple Music pursues low promotion, Spotify generates $2 billion while Apple Music generates $1.5 billion.
What happens if Spotify defects in the first period?
If Apple Music pursues low promotion but Spotify holds its price instead of raising it, Spotify attracts Apple Music’s subscribers and earns $3 billion, while Apple Music earns only $0.5 billion. However, this deviation will not go unpunished. In the next period, Apple Music responds by increasing promotion (a three-month free trial) to capture Spotify’s subscribers.
In that period, Spotify’s revenue falls for two reasons. First, it does not earn the higher revenue it could have earned by raising its price. Second, Apple’s aggressive promotion attracts some of its subscribers. Spotify earns $0.5 billion, while Apple Music earns $2 billion.
Anticipating this outcome, Spotify avoids holding its price and instead raises it, while Apple Music continues its tit-for-tat strategy by maintaining low promotion in response to Spotify’s price hikes.
What happens if Apple Music defects in the first period?
If Spotify raises its price but Apple defects by pursuing high promotion, Apple would capture Spotify’s subscribers, generating $2 billion in revenue while Spotify earns only $0.5 billion.
In the next round, Apple would be punished by Spotify, and its revenue would suffer for two reasons. First, it may be unable to attract Spotify’s users as Spotify switches from raising its price to holding it. Second, aggressive promotion (such as a three-month free trial) delays the generation of revenue. Apple would generate only $0.5 billion, while Spotify earns $3 billion.
Anticipating this punishment, Apple Music avoids pursuing high promotion and maintains low promotion, while Spotify continues its tit-for-tat strategy by raising prices in response to Apple Music’s low promotion.
4. In what type of market do Spotify and Apple Music operate?
The industry is an oligopoly for two main reasons.
- There is high interdependence among firms. A decision by one firm does not only affect itself but also other firms in the industry. For example, Spotify’s pricing decisions and Apple Music’s promotion strategies do not only affect their own revenues but also each other’s revenues.
- The four-firm concentration ratio is also well above the oligopoly threshold of 40%.
5. What are the two broad categories of games in an oligopoly?
Games in oligopoly can be classified along two dimensions: timing and repetition.
If both players choose their strategies at the same time without knowing what the other chooses, it is a simultaneous game. However, if players choose their strategies one after another, it is a sequential game.
If each player chooses a strategy only once and the game ends afterwards, it is a one-shot game (a game that is played just once). If they interact over multiple periods, it is a repeated game.
6. What type of game is being played between Spotify and Apple Music?
The game is sequential as both Spotify and Apple Music choose their strategies with a time lag.
The payoff matrix shows two rounds of play, making it a repeated game. In real life, there will be many rounds of interaction between Spotify and Apple Music, and the game will continue to be repeated until at least one firm exits the market.
7. What is the outcome of this game?
In a repeated sequential game, the threat of future punishment makes deviation from the current strategy unprofitable: Raising price becomes unprofitable for Spotify, while pursuing high promotion becomes unprofitable for Apple Music.
Spotify’s combined payoff from raising price in both rounds is $4 billion (2 + 2). If it defects and holds price in the first round, its combined payoff falls to $3.5 billion (3 + 0.5). Therefore, holding its price is not the best strategy to choose, and Spotify continues with price hikes.
The same analysis can be done for the situation where Apple defects and gets punished by Spotify. Its combined payoff if it pursues low promotion in both rounds is $3 billion, which is greater than the combined payoff of $2.5 billion if it defects in the first round. Therefore, Apple’s best response would be to pursue low promotion.
Such an outcome is called a Nash equilibrium, in which each player chooses its best response given the action of the other firm.
A sequential game played repeatedly opens the door to punishment for deviation from Nash.
Now take a short quiz to ensure you understand what you just read.