3 Reasons Amazon Is Itching to Stream Music

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Amazon (NASDAQ: AMZN  ) is reportedly in talks with record labels to license the rights to stream music. The web store, which includes the second-largest digital music store after Apple's (NASDAQ: AAPL  ) iTunes, could enter the music-streaming business as soon as this year. If it does, Amazon would compete against new entrants from tech giants Apple and Google (NASDAQ: GOOGL  ) , as well as Spotify.

Here are three main reasons a premium music-streaming service makes perfect sense for Amazon.

Digital downloads may have peaked
Digital music sales declined for the first time in history during 2013, as streaming cannibalized downloading. AmazonMP3 sold approximately $1.1 billion worth of digital music in 2012, accounting for 22% of the market.

Download sales had been steadily climbing, but this sudden stagnation is cause for concern. Apple invested in adding iTunes Radio to its iOS devices, and Google, which owns the most popular music-streaming site -- YouTube -- began offering Play Music All Access last spring. Both are designed to protect the companies from the decline in music downloads.

Google's service is more like a premium Spotify service, where users can stream music on-demand. Apple's iTunes Radio, on the other hand, is more like Pandora, which serves music based on prediction algorithms. Apple is betting that music discovery will help support downloads from iTunes. Considering that Apple has the most to lose in mp3 downloads, this strategy is fitting.

The other big players in digital downloads have already invested in streaming services. Amazon will have to play catch-up.

Prime needs a price hike
Amazon's Prime service has served the company well over the past decade. On average, a Prime member spends about twice as much on compared to non-Prime members, according to a report from Consumer Intelligence Research Partners

Unfortunately, shipping costs are starting to increase faster than Amazon can handle, and it warned last month that it may need to increase the price of Prime by $20 to $40. Bundling a music-streaming service with Prime could ease the pain for current subscribers. (I personally wouldn't mind, as such a bundle would actually save me money once I cancel my All Access subscription.)

More important for Amazon, it could certainly attract more people to Prime compared to the number it loses. Premium streaming services cost about $10 a month. At $120 a year, Amazon is practically giving away Prime Instant Video, free two-day shipping, and Kindle library lending. It'll be hard for Spotify and All Access subscribers to turn that offer down.

As a result, Amazon should be able to attract more people to its Prime service and continue growing revenue from its core e-tail business.

A Kindle phone
More than ever before, people use their phones as music players. Apple and Google have the advantage, for the most part, of controlling the smartphone ecosystem. iTunes Radio is nicely integrated into the standard Music app in iOS, and Google's digital download and All Access music service are integrated nicely into Android.

Rumors says Amazon could release a Kindle phone this year, and a streaming service could boost sales. Of course, offering a phone near cost, like Amazon does with its Kindle Fire tablets, may be enough to set sales ablaze. An integrated music-streaming service should move the needle that much more.

Getting more hardware into the hands of consumers is key for Amazon. The company has been facilitating Kindle Fire purchases by financing them over the course of a year. Amazon's control over Fire OS, its Android fork, means that it generates a significant amount of revenue after the sale of every Kindle purchase.

Moreover, Kindle ownership encourages a Prime subscription, but it's not clear if Prime subscriptions encourage Kindle ownership. A music-streaming service and a smartphone could certainly feed off one another, though.

Facing the music
Amazon isn't exactly close to getting a deal done with the record labels. It reportedly wants to receive a discount from other streaming services like Spotify and Pandora for the royalties it pays. Still, it only seems like a matter of time before Amazon adds music streaming to its Prime service. At that point, premium services from Google and Spotify may have trouble growing, as Prime offers significantly more value to consumers. For Amazon, it could be another home run as it attracts a growing audience of music streamers.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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