Why Is Amazon.com, Inc. Launching a Meager Music Streaming Service?

Amazon takes on Apple and Pandora with a neutered music streaming service for Prime members.

Jun 1, 2014 at 1:25PM

Amazon.com (NASDAQ:AMZN) might soon join the increasingly crowded music streaming business. Members of Amazon Prime will reportedly have access to curated music from certain labels. That's a limited selection compared to Pandora Media (NYSE:P), Spotify, or even Beats Music, which was purchased by Apple (NASDAQ:AAPL) last week. So why would Amazon bother joining the streaming fray with such a neutered service?

Kindle Fire Tablets

Source: Amazon.com.

Buzzfeed reported on Friday the as-yet-unnamed streaming service, citing unnamed sources in the music industry. The service would start this summer and include music that's at least six-months old and belonging to a small group of labels that have struck licensing deals with Amazon.

But why would Amazon want to offer a streaming product that is clearly limited when compared to the competition? 

Avoiding the content acquisition paradox
The labels teaming up with Amazon on this project will offer the online retail goliath a discount on the songs chosen for the service. Pandora, Spotify, and Beats Music all attempt to offer as much music as possible. And that model has hurt Pandora financially. 

As I've discussed in-depth, Pandora loses money as listener numbers increase thanks to high per-listen content acquisition costs. The company has started to improve its advertising revenue to compensate, but it's still an imperfect model when streaming is the only aspect of business. Apple also faces content acquisition costs with its iTunes Radio, but it's less of an issue because streaming is far from its primary focus. Apple simply wants to attract more customers to its iTunes store. And while they are there, perhaps they will purchase music, apps, and other media.

Amazon has similar motivations but doesn't want to deal with the content acquisition cost problem. Thus, a limited number of songs struck at a discount. But will that model really entice any new Prime members? 

Fleshing out the Prime family
The music streaming service wouldn't attract a crowd if that were the only benefit offered in the Prime service. But Amazon has spent the past year increasing Prime's offerings -- and bumped the price up from $79 to $99 per year. 

Amazon Prime memberships currently include: 

  • Free expedited shipping on millions of products through Amazon.com
  • Instant streaming of thousands of movies and television shows 
  • A Kindle Owner's Lending Library that allows borrowing a title per month from around 500,000 titles
  • Instant streaming of select, older HBO content 

Several of those perks have limitations to how much is offered but combining a wide range of benefits helps offset that weakness. And enticing more people to use the Prime service has the potential to create more customers who depend on the Amazon infrastructure for everyday shopping and entertainment needs. That group can further boost sales of products such as the Kindle Fire or new Fire TV, which in turn can boost the sale of content for those devices. 

And around and around it goes. 

Market reaction
Last week ended with the rumor of Amazon's streaming service. But Apple's $3 billion purchase of Beats (maker of high-end headphones and owner of Beats Music) complicated the music streaming industry. Shares of Amazon and Apple didn't react much to either story because neither service is a make-or-break issue for the companies. And Pandora barely budged because it should remain at the top of the music streaming business, despite increased competition. 

Does that mean the music streaming story and the Beats acquisition don't matter? No, it simply means that these stories should serve as only a small piece of the bigger picture when analyzing these companies. 

Foolish final thoughts 
Amazon's music streaming offer won't impress the masses if it proceeds as rumored. But the service could serve as a tipping point for some considering the overall value of a Prime membership, allowing the company to become a lifestyle brand such as Apple. And Amazon gets away from the content acquisition cost vortex that's nearly swallowed Pandora in the past. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Pandora Media. The Motley Fool owns shares of Amazon.com, Apple, 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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