Amazon Should Offer a Music Streaming Service

Digital music sales declined for the first time ever last year as streaming has grown in popularity. Subscription music services like Spotify, Pandora (NYSE: P  ) , and Google are stopping a growing part of Amazon.com's (NASDAQ: AMZN  ) revenue dead in its tracks.

AmazonMP3 is the second-largest digital music store after Apple's (NASDAQ: AAPL  ) iTunes. With music streaming growing in popularity and halting download revenue, perhaps Amazon should consider offering a music streaming service just as Apple has done.

Growth in streaming
2013 was a good year for streaming music. The number of songs streamed over the Internet by U.S. listeners increased 32% to 118 billion. The numbers out of the U.K. tell a similar story -- up 33.7%.

Pandora grew its active user base 20% year over year in the third quarter to 70.9 million. Its subscription revenue nearly tripled and its ad revenue increased 58%. The company's Internet radio service accounted for over 8% of the radio market in October of last year.

Meanwhile, Google launched its own premium subscription service -- Google Play Music All Access -- and made plans to launch a YouTube branded music service. Apple, the leader in digital music download sales, hedged its iTunes store with iTunes Radio.

Apple will look to gain market share by quickly expanding its iTunes Radio into the UK and Canada in 2014 -- two markets Pandora has yet to enter. Additionally, Apple will look to take on the Internet radio leader in Australia and New Zealand, where Pandora has done well, and Nordic countries to compete with Spotify's home market. Apple benefits from being able to bundle its streaming service with its popular iOS devices.

The increasing number of services signals a lot of potential in the space.

Why Amazon should join in
Amazon has a lot at stake. In 2012, the company sold approximately $1.1 billion worth of digital music.

More importantly, though, Amazon could benefit from the growth in popularity of music streaming through its Amazon Prime service. Amazon ought to be able to draw premium subscribers away from companies like Pandora, Spotify, and Google by bundling music streaming with Prime.

Amazon has already had great success with its Prime service. A press release, issued just after Christmas, indicated that it had signed up "tens of millions" of Prime subscribers. That's very impressive, considering analysts estimated the service had just 10 million subscribers as late as March of last year.

Amazon uses Prime as a tool to increase sales. On average, a Prime subscriber spends more than twice as much as a non-member according to Consumer Intelligence Research Partners. Even after paying for content rights and shipping, the additional revenue makes Prime subscribers profitable.

Interestingly, subscribers with free access to Amazon Prime Instant Video actually buy more videos through Amazon's digital video store. The average Prime subscriber buys or rents more videos from Amazon's premium video service. Amazon may be able to copy the success it had with video if it can manage the rights to a streaming music service.

Drawing subscribers away
As more people adopt streaming as one of their primary forms of music consumption, Amazon ought to get in. Because exclusive license deals are much more unlikely in the music streaming market -- the closest thing is pre-release streaming on iTunes radio -- the competitors will lean on user interface and additional benefits.

Amazon has lagged behind in its user experience with Prime Instant Video, but has still managed to draw tens of millions of subscribers -- the additional benefit of free two-day shipping is unmatched. Amazon can undercut other music streaming services on price and offer bonus services that can't be matched by the competition. And it has the potential to slow a decline in digital music sales.

How many of you would sign up for Amazon Prime if it offered music streaming?

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