Amazon.com Is Preparing to Challenge Apple Yet Again

With an entry into streaming music, Amazon.com is once again fighting against Apple to create a compelling digital ecosystem.

Mar 5, 2014 at 9:00AM

Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are the epitome of the term "frenemies." Sure, Apple's full array of computers, tablets, and other devices are available for sale on Amazon.com's core e-commerce site. While this mutually beneficial relationship is likely to continue, there is a building tension between the two companies. This tension will increase further as Amazon.com works to secure the deals with record labels necessary to launch its own streaming music service. 

A logical extension of Amazon Prime
Amazon.com has millions of subscribers to its Prime service. While Prime started as simply free two-day shipping, the service has quickly grown to contain value-added services including a library of over 41,000 streaming video titles and 500,000 free Kindle book titles. 

Amazon Prime has sparked intense debate regarding whether it is a viable alternative to Netflix's streaming video service. While most analyses focused strictly on video streaming tend to favor Netflix based on its video library and original programming, there is compelling value in the combination of Amazon.com's services.

Streaming music would be a perfect compliment to Prime Instant Video. For customers that shop online and consume video and books using digital platforms, music is a logical extension. A single payment for unlimited streaming of digital video, music, and books combined with fast and free shipping from the world's top e-commerce company creates a significant value proposition that no other company can match.

Streaming music is integral to digital sales
Apple and Amazon.com have both grown digital revenues significantly in recent years through the sale (and rental) of video and music content. While the purchase model will remain a key component of digital revenue going forward, it is important to recognize the surge in popularity of streaming.

Billboard declared 2013 as the first year in history in which the number of digital tracks sold actually declined. The decline from 1.34 billion tracks sold in 2012 to 1.26 billion in 2013 represents a decline of only 5%, but the shift in momentum is significant. Pandora Media's (NYSE:P) wildly popular streaming service reported 16.7 billion total listener hours during 2013. Not only is this an increase of 23% over the prior year, the strong results came in a year in which Apple's iTunes Radio streaming services and other competitors launched streaming music alternatives in recognition of the growth potential of streaming.

For ad-free streaming, Apple requires an iTunes Match subscription for $25/year and Pandora requires a $36/year upgrade to Pandora One. As a result, Amazon.com is presented with an opportunity to differentiate itself by providing millions of Prime subscribers with a comparable service free of charge.

More importantly, Amazon.com has likely recognized the same opportunity that Apple has: streaming audio with a convenient way to add songs to a wish list or purchase instantly will help drive digital music sales. Apple has made impulse buys easy with iTunes Radio, and there is no reason to doubt that Amazon.com will have its own one-click purchase alternative.

The next battle in the digital ecosystem war
Perhaps more interesting than the impact of an Amazon.com streaming music service on iTunes Radio and Pandora is how such a service will shift the balance of the iOS and Android ecosystem wars. Presently, Apple's iTunes offerings are only available on Apple devices such as iPad, iPhone, Mac, and Apple TV. Amazon.com has a far broader reach in digital video, including Mac, PC, iOS, Android, Roku, and a number of other platforms including blu-ray and smart televisions. However, Amazon Instant Video is conspicuously missing from Apple TV. 

Will a competing streaming music service be the move that ousts Amazon.com's apps from iOS? If not, Amazon.com's streaming music service has the potential to be as ubiquitous as Pandora's app. In a battle for market share, there is significant value in having availability on as many devices as possible. 

Competition in streaming music is likely one of the big reasons behind Apple's push to release CarPlay; access to vehicles would maintain Apple's ability to allow its fan base to enjoy streaming music in each of the most popular places to listen to music, including mobile, computer, vehicle, and home audio systems. 

More than one winner
While it will be interesting to see how the fight for market share in streaming music plays out, it is also important to remember that there will be more than one winner. If Apple's iTunes Radio didn't turn out to be a "Pandora killer" as many (myself included) thought it might be, the roll out of Amazon.com's streaming music service likely won't achieve that distinction either.

However, streaming music is yet another way that Amazon.com can expand its ecosystem and encourage the sale of its digital products. This fits nicely into the company's long-standing strategy of creating a compelling value proposition for customers in an effort to gain market share over the long term.

As a result, the roll out of a streaming music service would further strengthen the investment thesis that Amazon.com has tremendous opportunity for growth.

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Brian Shaw owns shares of Amazon.com and Apple. The Motley Fool recommends Amazon.com, Apple, Netflix, and Pandora Media. The Motley Fool owns shares of Amazon.com, Apple, Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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