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Look Out, Spotify: Amazon's Gunning for Your Free Subscribers

By Danny Vena - Nov 19, 2019 at 10:52AM

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The e-commerce giant is looking to grow its advertising revenue at the streaming music leader's expense.

Over the past couple of years, e-commerce leader ( AMZN -1.38% ) has been making serious inroads into the digital advertising space. The company generated year-over-year growth that easily exceeded 100% in the first three quarters of 2018, just missing the triple-digit mark with 97% growth in the fourth quarter. The company has left no stone unturned, exploring a number of avenues to advance its advertising ambitions.

Early this year, Amazon launched IMDb Freedive (since rebranded as IMDbTV), an ad-supported streaming video service that started in the U.S. and has since expanded to Europe. Shortly thereafter, the company rolled out a free ad-supported streaming music service exclusively for users of its voice-activated Echo smart speakers.

Now Amazon has taken a step that should have Spotify ( SPOT 0.11% ) management shaking in their digital boots.

A woman with sunglasses and headphones listens to streaming music from her smartphone.

Image source: Getty Images.

Going after Spotify's market share

Amazon announced Monday that it introduced a free version of Amazon Music, its free music streaming service. In addition to its Echo devices, listeners will be able to access the ad-supported service on a host of new devices, including Amazon's Fire TV, Alphabet's Google Android devices, and Apple ( AAPL -1.17% ) iPhones.

This will put the company on a collision course with Spotify, which ended the third quarter with 248 million monthly active users, including 113 million paid subscribers, and 141 million ad-supported users. Spotify generates more than 10% of its revenue from advertising.

Spotify's strategy has been to offer a free ad-supported level that acts as a funnel to attract the next generation of paying customers. Until now, it was the only major streaming music service to offer a free tier. The sheer magnitude of listeners using the ad-supported service made it attractive to advertisers looking for a target audience. Spotify's listeners could also choose to ditch the commercials for $9.99 per month, making those listeners even more lucrative for Spotify.

For comparison, Apple Music offers a similar paid subscription for $9.99 per month and has accumulated more than 60 million subscribers in the U.S., though it doesn't regularly provide updates to that metric. 

By offering a free, ad-supported version of Amazon Music, the company will further bolster its advertising revenue, while locking users into another of its growing list of services. At the same time, Amazon could be cutting into Spotify's leverage with advertisers, while also eating into its future paid subscriber growth.

Something for everyone

Earlier this year, Amazon offered a free ad-supported service to users of its Alexa-enabled devices -- like its Echo line of smart speakers -- but this is the first such plan it's offering to the general public.

Listeners have had a variety of paid streaming music plans available through the tech giant. Amazon Music Unlimited is a premium service that features tens of millions of songs and thousands of playlists and curated stations. Prime members can join for $7.99 per month or $79 per year, while non-Prime customers pay $9.99 per month. Amazon device owners get an even better deal via the single device plan and can stream Music Unlimited on their Echo or Fire TV for $3.99 per month. 

The company also offers a free tier that's included in its Prime subscription, called Prime Music, that includes more than 2 million songs and thousands of playlists and stations, which is included at no additional cost to Prime subscribers.

A girl wearing headphones while smiling and dancing

Image source: Getty Images.

Amazon's increasing focus on advertising

Amazon surpassed an important benchmark last year, generating more than $10 billion in advertising revenue and climbing the list to become the third-largest digital advertiser in the United States. Amazon isn't stopping there and views Spotify's freemium subscribers -- and anyone without a streaming music service -- as potential takeover targets.

Spotify has already been battling both Amazon and Apple for its paid subscribers. Now the company will have to fight for its ad-supported listeners as well.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned, Inc. Stock Quote, Inc.
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