Amazon Streaming Music Service Could Be Prime Membership Perk

by Brad Moon | February 28, 2014 11:45 am

Amazon (AMZN[1]) thrives on disruption.

The company upended the publishing industry and recently drove Sony (SNE[2]) out of the e-book business in North America. Its Kindle Fire helped usher in the age of cheap and small Android tablets — forcing Apple (AAPL[3]) to change its iPad strategy (no small feat). It has done a number not just on brick and mortar bookstores, but the entire retail sector[4].

Amazon took Google’s (GOOG[5]) Android operating system, turned it into its own Fire OS and locked Kindle tablet owners out of Google Play, subverting Google’s “give it away to win market share” strategy. The anticipated arrival of an Amazon set top box for the living room[6] is threatening everything from the Apple TV to Microsoft’s (MSFT[7]) Xbox One.

And now, rumblings have Amazon streaming music[8] as yet another AMZN disruption in the works.

This isn’t a re-hash of the Amazon Cloud Player music streaming service introduced in 2011. That product used Amazon’s Cloud Drive to store a user’s digital music purchases online, then let them stream those songs to a connected device.

This Amazon streaming music service would let a user stream any music from Amazon’s catalog for a set monthly fee, without having to pay for individual songs. If the model sounds familiar, it should. That basically describes the core functionality of Pandora (P[9]), Spotify, Rhapsody, Rdio, Google Play Music All Access and Apple’s iTunes Radio.

Having AMZN wade into the market with its own Amazon streaming music service is bad enough for these established players, but what makes the prospect even worse is the possibility that Amazon might give it away for free as a perk with its Prime membership.

There has been considerable speculation about the potential impact that raising its Prime membership fee might have on AMZN. Consumers love free stuff, and if that Prime membership were to be sweetened with free access to Amazon streaming music, it’s likely to make a price hike more palatable for customers.

According to Forbes, the free video streaming service already included with a Prime membership costs Amazon around $1 billion annually in content fees, or roughly $50 per customer[10]. That seems expensive (considering Prime with its unlimited free shipping costs just $79), but it generates a big payoff through purchases by Prime customers — Forbes calculates it at around $355 profit per year per Prime member.

Music content costs are considerably less than video. For 2012, Pandora paid out $258.7 million for content[11] while Sirius (SIRI[12]), the satellite radio service paid out $272 million. There’s a good chance AMZN may be able to squeeze out better terms from the labels and artists; but even if it can’t, the math says that at most, free Amazon streaming music would cost it an additional $13 or so per Prime customer. And with AMZN talking a $40 Prime membership hike, it should easily be able to eat that.

Established players like Pandora, Rdio and Spotify — and even relative newcomers like Apple with its iTunes Radio — should be nervous about the prospect of an Amazon streaming music service, especially one that goes for free with a Prime membership instead of charging a small fee. Amazon has a proven history of disrupting markets it targets, even when there are established incumbents.

Take e-readers, for example. Despite Sony’s year-long head start with e-readers and its embrace of open standards (which led to Sony e-readers being able to borrow e-books from public libraries long before a Kindle could), Amazon was able to quickly leap-frog Sony to dominate the market. This year, Sony gave up for good, announcing it would abandon the North American e-book market.

Then there’s the Kindle Fire. Amazon helped popularize the 7-inch Android tablet, a cheaper tablet with a smaller form factor that began chewing into market Apple once owned. While AAPL refused to make a smaller tablet (Apple’s Steve Jobs famously pronounced the 7-inch tablet as DOA[13]), its tablet market share steadily shrunk as Amazon and Google forged ahead with smaller tablets they could sell for much cheaper.

Apple was forced to react — something it was not accustomed to doing in the tablet market — backtrack on its position, and deliver the smaller and (slightly) cheaper iPad Mini.

But the damage had been done with Android tablets (including Amazon’s Kindle Fire) last year overtaking Apple’s iPad as the dominant tablet platform[14]. Amazon streaming music could be just as disruptive.

We don’t know what an Amazon streaming music service will be called, and we don’t know exactly when it will launch. But we’re pretty sure it will happen. If nothing else, the fact that AMZN has been snapping up music execs with a background in streaming[15] and content licensing is a very strong signal.

When that Amazon streaming music launch happens — especially if it’s rolled into a Prime membership — there are going to be some worried faces at Spotify, Rhapsody, Pandora and the other streaming music services.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/02/amazon-streaming-music-amzn/

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