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Amazon Can't Help but Rain on Spotify's Debut

By Adam Levy – Updated Apr 6, 2018 at 1:57PM

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Amazon released details about its music streaming service the day before Spotify stock started trading.

It's no coincidence that Amazon (AMZN -1.57%) chose April 2 to release a story to Billboard about its paid streaming service, Amazon Music Unlimited. Amazon wanted everyone to know it has "tens of millions" of subscribers and its listener count doubled in the last six months. The next day, Spotify (SPOT -0.62%) made its debut as a publicly traded company.

Spotify also has "tens of millions" of subscribers -- between 73 million and 76 million in the first quarter. It's also adding tens of millions of new subscribers every year despite rapid growth from both Amazon and Apple. It doesn't expect that growth to slow down this year, either, forecasting 21 million to 25 million net subscriber additions for the year.

But with Amazon appearing as a bigger threat than it seemed to be just a couple of days ago, do Spotify's newest investors need to be worried?

Amazon Echo on a bookshelf.

Image source: Amazon

The goal of Amazon Music Unlimited

The biggest thing that makes Amazon's service stand out from the competition is its price.

  • Prime members can pay just $7.99 per month or $79 per year ($6.58 per month) for access to roughly the same 35 million songs that are on Spotify or Apple Music.
  • Amazon also offers a discount for Prime members that pay for a full year of their family plan up front -- $149 per year ($12.42 per month) instead of $14.99 per month.
  • If someone is only interested in listening to music on their Amazon Echo device, they can pay $3.99 per month to stream songs on just one device.

Price is by far the biggest differentiating factor for Amazon Music Unlimited, and Amazon likely has a lower average revenue per user than Spotify. Last year, Spotify brought in an average of 5.32 Euros (about $6.53) per month from each of its subscribers.

But unlike Spotify, Amazon isn't looking to make money off of its streaming service. Instead, it's used to retain Prime subscribers and get people to use their Echo devices more often. Amazon says Prime members that use its digital media services spend more on its online marketplace, and third-party surveys indicate customers that use an Echo spend the most.

In fact, Amazon Music VP Steve Boom attributes the growth of Amazon Music Unlimited to the popularity of Prime and the Echo. The Echo, in particular, allows Amazon to reach customers that wouldn't actively seek out a music subscription. But when they find out they can buy a speaker that will play any song they can think of as soon as the title comes out of their mouth for just $4 per month, it's a tough offer to turn down. More than half of Amazon Music users have used the Echo's voice functionality.

Different demographics

Amazon's success has come from a couple of relatively untapped demographics from Spotify and Apple: older listeners and country music listeners. Amazon Music Unlimited subscribers listen to 2.5 times as many country songs than users on other platforms.

"Our goal has been to expand the premium streaming market segment, not to run in a horse race with the other players each going after the same demographic," Boom said. 

That's an important note. As mentioned, Amazon's real goal is to get people to use their Echo more and stay subscribed to Prime. If you use your Echo to stream Spotify, it doesn't care. But if Amazon can convert someone that wouldn't typically subscribe to a music service into a streaming music junkie, that's where it can benefit.

As such, Amazon Music Unlimited isn't a huge immediate threat to Spotify.

That said, Spotify will eventually need to capture the long tail of music subscribers -- the older country music listeners, if you will -- in order to keep growing its subscriber count. And winning over as many subscribers as possible is key to its long-term profitability. If Amazon continues to grow at its rapid pace for several more years, it'll eventually be taking away subscribers from Spotify instead of simply adding to the pool of streamers, and that's something Spotify investors will need to keep an eye on.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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