Amazon.com, Inc. (NASDAQ:AMZN) has been phenomenally successful in the online retail space. This success has, unfortunately, failed to rub off on the company’s hardware. Amazon has no shortage of hardware also-rans that trace their origins back to the company’s famous Lab126. The Amazon Fire smartphone, whose production Amazon discontinued last year, is the company’s most high-profile hardware flop.
And that’s just too bad because Amazon is now looking to launch a standalone Amazon Music service to compete with the likes of Apple Inc.‘s (NASDAQ:AAPL) music service and Spotify.
AMZN plans to price the new service at $10 per-month, similar to what Apple Music and Spotify charge for their respective services. Amazon is also reportedly planning to launch a cheaper Echo-only service that it will price at $4 to $5 per month.
Both services will provide unlimited ad-free music, which is a good way for Amazon to compete with other low-cost music streaming options, most of which feature playback caps. Tech Crunch suggests Sept. 14 as a possible launch date for the Echo-only service.
AAPL Wins With the iPhone
Amazon already has Prime Music, which it bundles together with other Prime services, but apparently wants a standalone service that’s untethered to Prime to compete with the likes of Apple Music. The pricing for the Echo-only service appears like a steal and heavily undercuts Apple Music’s $9.99 monthly subscription fee or $14.99 for a monthly plan.
On the surface, this does not bode well for Apple Music, which has been pretty successful since its launch 15 months ago. Apple Music has managed to garner a cool 15 million subscribers, of which 13 million are paying subscribers.
In comparison, Spotify, a music streaming service that came into being eight years ago, boasts 100 million subscribers of which just 30 million pay for the company’s premium services. Spotify operates a freemium model that has been successful at attracting hordes of subscribers. The chief perk for paying customers is that they get ad-free and on-demand music using Spotify apps.
But Apple Music sports a better revenue model than Spotify. What’s remarkable about Apple Music is not only the fact that the service already boasts half the number of paying subscribers as Spotify, regarded as the world’s most popular online streaming music service, but also that it enjoys much higher sell-thru.
A full 87% of Apple Music subscribers are paying customers compared to just 30% for Spotify. This is partly because Apple Music offers a three-month free trial period that literally forces users to upgrade or be cut off.
The biggest reason though why Apple Music has become such a rapid hit is a bit more nuanced — the ubiquity of the iPhone. Apple Music comes pre-installed on every new iPhone handset and also with iOS software upgrades on older iPhones, meaning it’s available on both new and older iPhone models. AAPL Music is available in more than 120 countries around the globe.
Essentially, this means that ~500 million of the nearly 700 million-strong iPhone installed base has access to the service. This also implies that AAPL Music still has a huge addressable market that is still untapped.
And that unfortunately happens to be Amazon’s Achilles heel. Amazon lacks a strong hardware ecosystem that can drive that kind of rapid adoption for Amazon Music. Echo, a voice-enabled wireless speaker developed by AMZN, is one of the company’s most successful hardware products with more than 3 million devices sold two years after its launch. Maybe that’s because it was Jeff Bezo’s brainchild and pet project. But 3 million sold devices is a drop in the bucket in the grand scheme of things.
Bottom Line on Amazon Music vs Apple Music
Apple Music is already on a ~$1.5 billion annual run-rate, an impressive accomplishment for a service that has only been around for little more than a year. Although Amazon’s powerful brand recognition in the retail sector is a potential problem for Apple Music, its lack of a large hardware installed base creates a serious handicap for Amazon Music and limits its ability to compete effectively with Apple Music.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
