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Amazon's $7.99 Trick Is Brilliant

By Rick Munarriz – Oct 15, 2016 at 10:07AM

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The leading online retailer's new service comes with a 20% discount for Amazon Prime subscribers.

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It's hard to stand out in the cutthroat world of premium on-demand music unless your name is Spotify or you have the birthright of Apple (AAPL 3.28%), but (AMZN 6.15%) may have found a way to crack the code. The leading online retailer unveiled Amazon Music Unlimited on Wednesday, a digital offering that like Spotify and Apple Music gives music buffs ad-free access to a catalog of millions of songs for a monthly ransom. 

The service is priced at $9.99 a month, in line with what Apple Music and Spotify Premium charge. The uniformity in pricing makes sense. The major record labels are still waxing nostalgic for the loss of digital download revenue, which in turn wasn't as lucrative as the CD sales that were disrupted. There's no point in being bold enough to call this collusion, but it sure seems like an eerie coincidence that premium on-demand platforms flock to the same price point.

However, the reason that Amazon Music Unlimited stands a fighting chance in this seemingly crowded niche with predetermined victors is that it's actually available for less than rival platforms for subscribers of the Amazon Prime loyalty shopping program. Folks who are already paying $10.99 a month or $99 a year for the platform that offers free two-day shipping on Amazon-warehoused goods along with other digital goodies can enjoying Amazon Music Unlimited for just $7.99 a month.

Prime numbers

Offering its new audio smorgasbord at a 20% discount to rival offerings for Prime subscribers is a shrewd move. It doesn't seem like the first shot of what would otherwise be a long and brutal price war. Record labels can rest easy at $9.99 a month, playing this off as just a promo that's bundled with an already premium-priced subscription program.

This is just Amazon subsidizing another digital service for its most active shoppers, something that it has done for years by giving Prime members a growing catalog of online video offerings at no additional cost. However, there are already a lot of Prime shoppers. Amazon has only offered up that there are "tens of millions" but Consumer Intelligence Research Partners estimates that it's now up to 63 million members. That's a pretty big crowd, and when you consider that Prime customers tend to be an affluent lot of web-savvy early adopters -- a well-stocked pond to go fishing for streaming music subscribers -- Amazon has found a way to offer a commoditized product at a discount to the competition.

Apple is too worried about restoring margins to their former glory and too bent on high-end consumers to play the cutthroat game. Spotify is too one-dimensional to have anything else to subsidize. Amazon may be late to this niche, but it's in a good position to make up for lost time.

Echo chamber

Amazon's also introducing a version of Amazon Music Unlimited that costs just $3.99 a month, a great price until you realize that it works only with a single Echo, Echo Dot, or Amazon Tap. This was a silly idea when the rumored offering was first reported two months ago. Outside of hermits, who wouldn't want a service that can go wherever one wanders?

However, the $7.99-a-month offering for Prime customers -- something that breaks down to just $6.58 a month for folks paying $79 for an entire year -- is a game changer. Amazon has thrown its hat into a ring where it's hard to stand out, and it's standing out.

Rick Munarriz owns shares of Apple. The Motley Fool owns shares of and recommends and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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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