Music streaming does nothing for Apple's bottom line (AAPL)

Apple Music will lead all of Apple's services in revenue, according to Macquarie's Ben Schachter.
But its elevated cost structure means it will only contribute 3.4% of all of Apple's service business profits.
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Apple Music will bring in more revenue than any other Apple service, but won't really help the company's bottom line.

Wall Street has recently located Apple's services business as a savior for its long-term growth prospects now that iPhone sales may be hitting a plateau.

In a March note, Morgan Stanley said it expects "increasing value in the Apple platform, particularly through services monetization."

Schachter believes that Apple Music is the most promising revenue generator out of all other services it offers, and could represent 15% of its services revenue by 2020.

Spotify and Pandora are of course two leaders in the music subscription business, but this graph from Macquarie shows Apple steadily catching up:

Screen Shot 2018 04 17 at 2.22.40 PM

"We are modelling Apple Music as the fastest growing contributor to Services revenue over the next three years," Macquarie analyst Ben Schachter wrote in a note to clients.

He pointed to Apple recently disclosing it reached over 40 million paid subscribers, up from 30 million in September 2017. The standard monthly fee for each Apple Music subscriber is $9.99, but can go up to $14.99 depending on the type of plan a user chooses.

Despite Apple Music being the biggest generator of revenue in the company's service business, it likely won't contribute much to its bottom line. That's because Apple Music has a more elevated cost structure than the tech giant's other service businesses.

While Apple Music could represent that 15% of its total service revenue, it will only comprise 3.4% of Apple's services gross profit by 2020, Schachter projects. He estimates Apple Music's profit margin is just 15%, a far cry from the App Store's 90% margin.

Schachter thinks "investors should focus on the growth of the App Store, not just total Services."

Apple is up 3.6% this year.