Amazon.com, Inc. (AMZN) is reportedly preparing to launch its own standalone streaming music service. If so, it will join Apple Inc.’s (AAPL) Apple Music, Spotify and Alphabet Inc’s (GOOG) Google Play in a market that’s increasingly dominated by tech giants. The entry of Amazon seems likely to be the final blow to the era of streaming music startups, and likely spells the end of Spotify as well.
The end of Spotify. That’s an inflammatory statement, but here’s the logic behind it.
Spotify has not only withstood the arrival of Apple Music — a competing service that seemed likely to eat into its user base — but it’s continued to grow, pretty much at the same rate as Apple Music. It’s at 30 million paid subscribers at this point, after adding 10 million since Apple Music launched.
However …
The End Is in Sight
The streaming music business is not for the faint of heart and while Spotify is a big name, other big names have collapsed since Apple and Google entered the fray. Rdio was one of the pioneers and it shut its doors late last year, despite having founders with very deep pockets and a year-long head start in the U.S. over Spotify. Pandora Media Inc (P) has been streaming since 2000, but shares of the company have tumbled nearly 40% over the past year and it’s been under increasing pressure to put itself up for sale.
Spotify itself continues to operate in the red, despite growing its paid subscriber base. Last year, Spotify revenues hit $2.18 billion, but it still lost nearly $194 million. The company has yet to make money.
That money-losing business model is a big part of the problem. A startup pushing into a new market can get away with losing money quarter after quarter, so long as it shows decent revenue growth and a realistic prospect of outlasting any competitors to become a dominating — and eventually profitable — company.
That was Spotify, Pandora, Rdio and dozens of other streaming music service when they launched. Investors were willing to lose money in the short term while they snapped up listeners and slowly converted them to paid subscribers. But then the big tech companies decided they wanted in, and that completely changed the equation. Having Amazon pile on would take the situation from bad to dire.
Enter Amazon Music
Apple and Google have the ability to put their streaming music service front and center on every mobile device they sell, the kind of placement Spotify can only dream of. Both companies have deep relationships with record labels, and because they also sell digital music, that relationship is even tighter and can be leveraged for release exclusives.
They have marketing budgets far beyond what Spotify could dream of. Profitability of streaming isn’t a big concern to these giants — as much as anything, the service is just another component in a vast product ecosystem, and if streaming helps to promote something else (like hardware sales), that’s good enough.
Amazon entering the fray isn’t going to kill Spotify itself, and the demise won’t happen immediately. But it will mark the point where streaming music becomes the battleground between three of the biggest companies on Earth; including one (Apple) that essentially killed the traditional record store and became the dominant way to buy music, and another (Amazon) that’s the biggest seller of physical music like CDs and vinyl.
This is the point where it makes almost no sense for a startup to risk entering the market and it marks the point where competing services from smaller companies — as beloved as they may be — begin to wither.
Spotify’s losses aren’t sustainable forever and the long game of scooping up all those digital downloaders and converting them to streaming subscribers is no longer easy pickings if you have to compete against Amazon, Apple and Google to get them.
Bottom Line on Amazon Streaming
The reality is, most consumers aren’t going to pay for multiple streaming music services, and if they choose Apple Music, Google Play or the forthcoming Amazon music offering, they aren’t also going to subscribe to Spotify.
Many of the customers that an Amazon streaming music service signs up aren’t going to come from the Apple or Google camp; they’ll likely be net new to the game (depriving Spotify from future subscribers) or defecting from Spotify itself.
But Amazon still has legwork to do before launching Amazon Music or Prime Music or whatever it decides to call its standalone streaming service. It currently offers a catalog of “over a million” songs to Amazon Prime subscribers, but that’s peanuts compared to the competition: Apple Music, Google Play and Spotify each offer more than 30 million songs.
Once it’s live and Amazon streaming is competing against rivals Apple and Google? Well then, Spotify’s days are numbered, and its best bet at that point will be to sell itself to one of the giants who’s looking to book a big chunk of subscribers in the hope they stay.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
