Prime Music: What You Need to Know About Amazon.com, Inc.'s New Streaming Service

Source: Amazon.

In less than one week, Amazon.com (NASDAQ: AMZN  ) will unveil the mythical smartphone that it's been working on for years. Ahead of the event, Amazon has introduced its rumored Prime Music service. Investors that are even remotely familiar with Amazon or its popular Prime service will know what to expect here: a music streaming service that's now bundled in with a Prime subscription.

Should Apple (NASDAQ: AAPL  ) or Pandora Media (NYSE: P  ) be concerned with Amazon's entry?

What it is
Prime Music will now be the fourth component, alongside the current shipping, Kindle library, and Instant Video offerings. There are no ads, and no limits to how much you can listen. Prime Music will start off with just over 1 million songs available. The service will also offer curated playlists, which is an area fellow heavyweights are focusing on. In effect, Amazon will offer both on-demand as well as curated service.

There is also no additional cost, unless you consider Prime's $20 price increase in March the culprit. Amazon had attributed the bump to higher fuel and transportation costs. The free two-day shipping service does have the most variable costs associated with it, and is quite likely the most used aspect of Prime.

What it isn't
The on-demand library is relatively small compared to competing services, particularly Spotify. Spotify currently has over 20 million songs in its library, although availability may vary by country due to licensing restrictions.

Sony Music and Warner Music are on board, but Amazon was unable to ink a licensing deal with Universal Music Group, the largest record label. The two companies reportedly couldn't agree on financial terms, and as a result Prime Music won't have many hit artists like Katy Perry, Tom Petty & The Heartbreakers, Lady Gaga, and many more. There also won't be any new releases, and the delay window is supposedly 6 months.

Universal will create a big hole in the catalog, but Amazon still has a healthy starting point. Plus, since Prime Music is being bundled in at no additional cost, it's hard for subscribers to complain about getting effectively free access to another library.

The competition
Prime Music won't directly compete with Pandora. Amazon has hired music experts to form a creation team that will put together playlists. The approach is different though. Pandora uses its curation team to break down songs by around 450 different attributes, and then applies its algorithm based on user inputs to facilitate music discovery. That's Pandora's greatest strength, and one that's not so easily overcome.

It's true that curation talent was a big part of Apple's Beats acquisition, but both Apple and Amazon tend to use related services to sell what they really want you to buy. In Apple's case, that's an iPhone. In Amazon's case, that's a Prime subscription.

And the plot thickens
The plot twist here is that Amazon's smartphone is about to see the light of day. I still believe that Amazon will use some type of Prime Data service that streams Prime Music without counting toward data caps, with Amazon footing the bill.

Prime Music does offer downloads and offline playback, which Amazon specifically notes will allow customers to "avoid costly data plan charges." That hints that Amazon is interesting in helping customers avoid data overages, and could be one of the aces up its e-sleeve.

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