Apple iTunes Could Benefit From Twitter's Data

Did you try Twitter #Music? Don't worry, most everyone else didn't either, and it looks like Twitter has shut the doors on the app.

No, this won't have a material impact on Twitter's quarterly report. I mention it for two reasons: No. 1: #Music was actually very good, No. 2: Apple , the leader in digital music, just bought Twitter analytics company Topsy.

How Apple plans to use Topsy is unclear. I think a music recommendation engine is just the tip of the iceberg. Topsy's data mining capabilities can provide very useful insights and opportunities for Apple.

What the heck is Topsy?
Topsy is one of just four companies Twitter deems "certified data resellers," which have the right to access Twitter's data and resell it. Topsy pays Twitter a chunk of the $47.5 million in annual revenue it gets from data mining companies. In exchange, Topsy is able to analyze the data, repackage it, and sell it to anyone who might find it useful.

At its heart, Topsy spots trends. If something is going viral, Topsy sees it. If news breaks, Topsy knows first (well, technically, second). It knows what people are watching on TV, and it knows what they're listening to.

The iTunes Store
The iTunes Store was Apple's fastest growing segment in fiscal 2013, increasing sales 24% over 2012 to $9.3 billion.(10-K pg 29) With over 600 million accounts, growing at 500,000 each day, iTunes is Apple's most popular product.

The average iTunes user spends about $12 per year on music, $4 on video, and $16 on apps. That's much less than what iTunes users spent before music streaming services like Pandora and Spotify grew in popularity, but volume keeps total revenue growing.

Perhaps, however, Apple can use Topsy's data mining capabilities to improve its average revenue per user on iTunes. People talk about movies, music, TV shows, and apps on Twitter all the time. Those data can be used to improve the discovery model of the iTunes store, which Apple failed to improve with its Chomp acquisition early last year.

Competing with Pandora
Apple launched iTunes Radio in September with the release of iOS 7. The Internet radio service baked into the iOS music app has drawn 20 million listeners in just a couple months. At the same time, Pandora lost 1.8 million of its 72.7 million listeners in October.

Pandora was able to increase total listener hours, however, with the help of lifted time restrictions for free users. Overall, Pandora listeners accounted for over 8% of total Internet radio hours in October.

Pandora's biggest advantage is its recommendation engine, the music genome project. The MGP is unmatched by any other service in that it's able to serve listeners not only what's popular, but what's going to be popular -- real music discovery. Nobody else is doing this.

Mining Twitter's data with Topsy could lead to some interesting insights -- bands that follow Mumford and Sons (or vice versa) may be of interest to Mumford and Sons fans. Creating radio stations around what's popular on Twitter can be a hit. But Apple won't be able to match the MGP without copying Pandora.

Luckily for Apple, it doesn't really need to. Any incremental improvement to iTunes Radio will likely draw some subset of listeners, and a subset of those listeners will discover something and download it from the iTunes store.

$200 million worth of Twitter data
I think it'll be quite easy for Apple to extract $200 million (the reported sale price) of value from Topsy. iTunes is just one area that Topsy could help improve. The data on Twitter has proven immensely useful for dozens of different applications.

With a company the size of Apple soon to be one of Twitter's biggest data purchasers, the social network could potentially begin raising its rates and increasing that $47.5 million revenue stream.

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Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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