While Apple's (AAPL) - Get Report iPhone continues to be its biggest money-maker, the company's services segment remains robust and could drive traffic in the future, according to Action Alerts PLUS co-managers Jim Cramer and Jack Mohr. Interest in improving that business segment could be what is driving the company's pursuit of music streaming service Tidal.
Apple's interest in purchasing Tidal is in keeping with a consolidation in the music streaming business that mirrors the consolidation the music industry at large has been going though for the past decade.
Apple -- a key holding of the Action Alerts PLUS charitable trust -- bought Beats by Dre for $3 billion in 2014 and immediately turned the headphone and audio equipment maker into the host and brand of its music streaming offerings. Two years and 15 million monthly subscribers later, Apple Music is looking to augment its streaming service by adding the technology and musical catalo of Tidal, one of its main rivals.
"On one hand, Apple Music has been growing and is a contributor to the Services business, which we believe will be a great growth driver for the company over the long term," Cramer and Mohr wrote in a recent note. "Management has made focused commentary on their belief that their music business is close to reaching an inflection point, so we are not surprised to see them allocating more time to improving the product, which has been hit by some criticism over its usability."
Tidal was purchased by a consortium of musicians led by rapper Jay-Z for $53 million in 2015. Tidal's business model is basically to offer a higher-quality streaming experience with an exclusive catalogue of music and videos that can only be accessed through its service. Tidal releases music on its platform that can't be found on YouTube, Spotify or Apple Music. The arrangement forces fans of artists with exclusive deals with Tidal to either forgo hearing some of their favorite artists or wait until the music is pirated and hits the wider internet anyway.
That exclusivity, while frustrating for fans, has been duplicated by Apple, which has deals with some of pop music's biggest artists, including Taylor Swift and Drake. Meanwhile, Tidal's roster of artists includes Jay-Z, Kanye West, Beyonce and Rihanna.
A marrying of Tidal and Apple Music would be a boon for music lovers, who would not need to choose between purchasing either subscription service so they can have unfettered access to their favorite artists.
If Apple and Tidal were to consummate a deal, their combined subscriber base of about 20 million would still pale in comparison to sector leader Spotify's 30 million subscribers. But armed with exclusive content from some of the world's most popular artists and the ubiquitous nature of almost anything Apple releases, Spotify would have healthy competition on its hands.
While Cramer and Mohr would prefer Apple build its music streaming service from the inside out, they see the value of purchasing Tidal. "Either way, we will continue to follow this story and still believe the Services business is undervalued by the market for its long-term potential. We reiterate our $130 long-term price target," last week's AAP note concluded.
Editor's Note: This article was originally published at 5:19 p.m. EDT on Real Money on July 5.