Amazon (NASDAQ:AMZN) introduced a streaming music library for Prime members all the way back in 2014. It actually beat Apple (NASDAQ:AAPL) to the market by about a year, in its efforts to capitalize on the sensation and type of service Spotify (NYSE:SPOT) eventually popularized.
But it's only in the last couple years that Amazon has started focusing on the potential for its music streaming service. And that focus is paying off.
The company now has 55 million listeners across its music streaming service for Prime members, its newer ad-supported service, and its more robust Amazon Music Unlimited service. That still trails Spotify's 248 million global listeners by a wide margin, but it's closing in on Apple's 60 million subscribers.
And it won't be long before Amazon surpasses Apple. The company said listeners grew nearly 50% over the last year in its more established markets like the U.S., U.K., and Germany. In newer markets, like France, Italy, and Spain, it more than doubled its listeners.
While it's easy to compare Amazon Music's growth to competitors like Spotify or Apple, the service has much broader implications for Amazon's business than just a new revenue stream.
All about Prime
While Amazon offers several tiers of service for Amazon Music listeners, it's very likely that most of its listeners pay for the service through their Prime membership.
Amazon isn't exactly targeting the same audience as Spotify or Apple with its music streaming service. While the competitors go for young consumers with mobile-first leanings, Amazon is going for older consumers with more disposable income. As a result, it's been able to grow quickly despite the intense competition.
Moreover, the growth of Amazon Music supports Prime memberships. Just as members who watch Prime Video are more likely to maintain their Prime memberships, Amazon very likely experiences a similar behavior from those that use Amazon Music. After all, engagement with the service indicates those subscribers get more value from the service, which ought to increase their willingness to pay.
Apple's efforts with Apple Music are similar, albeit not with the same efficiency. Apple Music subscribers lean heavily toward iOS. And when a customer subscribes to Apple Music, they're more likely to buy an Apple device at some point in the future.
The drawback is that device purchases aren't as regular as a monthly or annual Prime subscription. Additionally, Apple is largely limited to iOS device owners and potential owners, whereas Amazon has a much broader market for Prime members.
Supporting other preferable shopper behavior
On top of making Prime more valuable for a growing number of subscribers, Amazon Music also supports a few other Amazon products.
Amazon Music listeners may be more likely to buy an Echo device in order to take full advantage of their subscriptions. While it's possible to stream Amazon Music on other smart speakers, the user experience is superior on Echo speakers. Amazon facilitates the behavior of listening to Amazon Music on Echo devices by offering a single device subscription to Music Unlimited for just $3.99 per month.
Amazon gets a lot more than a device sale when someone buys one of its Echo speakers. Echo owners have historically spent more on Amazon's marketplace than customers without an Echo device.
Furthermore, Amazon is making a big push to sell more repeat-purchase items and groceries, which better lend themselves to voice ordering. As such, establishing a bigger presence for Alexa over competing voice assistants could produce an even higher return for Amazon in the future.
Amazon's relatively new ad-supported listening option provides additional ad inventory to its burgeoning advertising business.
Amazon is quickly expanding its ad business beyond search ads, which represent the vast majority of its ad sales. Display ads in its video and music products provide additional touchpoints for brands advertising on Amazon's marketplace, and Amazon can provide excellent measurement for those impressions based on actual sales data from its marketplace. Offering the option for audio ads in Amazon Music may make the entire Amazon advertising ecosystem more appealing to some advertisers.
Not competing with Spotify or Apple
The growth of Amazon Music's listenership is phenomenal, but investors shouldn't really focus on how its subscriber numbers stack up against Apple Music or Spotify.
Pointing out that Amazon Music still only has less than one-fourth the listeners of Spotify, or that most listeners don't subscribe to Music Unlimited -- the most comparable offering to Spotify Premium or Apple Music -- misses the value of Amazon Music.
Instead, investors should look at what percentage of Prime members use the service (not that Amazon will probably ever share that number). Look at how Amazon Music's growth correlates with sales of Echo devices -- which topped Amazon's list of best sellers on Cyber Monday.
Spotify's 248 million listener base is best used as an indication of how big the market is for streaming music services. (Spotify is notably in many markets Amazon Music isn't.) It shows the potential for Amazon Music as a means to support Amazon Prime, Echo sales, and its advertising business.