Amazon (NASDAQ:AMZN) is the third-largest streaming music platform in the U.S. after Spotify (NYSE:SPOT) and Apple (NASDAQ:AAPL). In true Amazon form, though, it won't say exactly how many people actually subscribe to Amazon Music Unlimited, only letting on that it has "tens of millions" of paid customers. It also said subscribers doubled in the six months from October to April this year.
Amazon did all of this without much in the way of marketing, but that might be about to change. The company is launching a multinational ad campaign to drive subscriber growth for the burgeoning music service. The campaign will include television ads in the United States featuring songs from popular artists, according to a report from Bloomberg.
Amazon is ready to start pushing its music service, but can it take on Apple and Spotify?
A unique angle
While Spotify is the global leader in music streaming, getting a massive head start on legacy digital download companies like Apple and Amazon, Apple has shown that it's not impossible to catch up. Music streaming is accelerating, and there's still room to jump on the bandwagon.
Apple was able to convert millions of its customers into paid subscribers because it owns half the phones in Americans' pockets. Smartphones have become the main way people listen to music.
Amazon owns a secondary category of listening devices -- the smart speaker. The smart speaker market is growing rapidly, however, and Amazon is well positioned for the future with its line of Echo speakers. The Echo provides another way for consumers to interact with the online retailer and encourages more shopping on Amazon. The average Echo owner spends 30% more than the average Prime member on Amazon.com.
Amazon Music Unlimited works best on Echo speakers. And if a consumer wants to listen exclusively on their Echo device, they can get a big discount. Echo-only subscriptions cost just $4 per month compared to the $10 per month standard subscriptions for Apple Music and Spotify.
Music Unlimited's pricing is also designed to encourage customers to sign up for Prime. Prime members get a 20% discount on regular pricing, paying just $8 per month.
Prime membership is one of the key pillars of Amazon's business. It's responsible for attracting growing amounts of traffic and converting that traffic at a rate higher than the competition. That's allowed Amazon to continue taking share of the growing online commerce market. Prime is also often a launching pad for new services such as Prime Video, Fulfilled by Amazon, or its own shipping service.
Because of the importance of the Echo and Prime to Amazon's business, Amazon is willing to take a loss on subscriptions in order to encourage consumers to buy one of its devices or sign up for Prime. That's something Spotify can't do, as its main source of profits is subscription revenue (it currently loses money on free listeners). Apple, meanwhile, is simply looking to break even on its service and lock consumers into its device ecosystem.
Can Amazon overcome the leaders?
Spotify's main competitive advantage is its playlists. It has more listeners than any other service, which provides it with loads of data. Spotify then uses that data to create personalized playlists for its users. Additionally, user-created playlists account for about one-third of listening, so the network effect also drives consumers to the platform.
Apple's competitive advantages in streaming music are its strong brand associations with music (Apple and Beats) and the integration it can make with its hardware. Those are advantages more easily overcome, especially considering Music Unlimited's integration with Echo devices and its pricing.
Still, Amazon has an uphill battle ahead. Apple may have been able to overtake Spotify in the U.S. (Apple's strongest market), but it still lags considerably internationally. Amazon now faces both Spotify and Apple as it fights for streaming hours and subscription dollars. The ad campaign is something worth keeping an eye on, and spending will show up in Amazon's growing marketing budget. Amazon probably won't release any details, but investors should look for commentary about how Music Unlimited, Echo, and Prime are all growing during each earnings release.
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.