The streaming music world has generally proven not to be the most lucrative for tech companies. Pandora (NYSE:P), which was, for a while, the main publicly traded company in the industry, isn't exactly known for its huge profit growth. Yet, a number of major tech companies are now looking to get in on streaming music. Amazon.com (NASDAQ:AMZN) is reported to be bundling Prime with a streaming music service, and in a move that sent ripples through the sector, Apple (NASDAQ:AAPL) will be acquiring Beats to supplement its own offerings. What makes the industry so attractive?
Prime stepping up
As if consumers needed any more reason to get in on Amazon Prime, which already boasts some 20 million members and offers free two-day shipping as well as on-demand video, the company will be expanding the service to offer streaming music. Reportedly, it will work much like Prime Instant Video. Unlike Pandora, Amazon.com will focus on offering a limited selection of songs, which do not include recent releases. The service is set to launch over the summer.
According to reports, Amazon.com has already reached a tentative agreement with several major labels, which will have the power to pick and choose which songs and albums will be available, much like the deal Amazon.com signed with HBO. The service will be available on a range of platforms and will also include offline functionality.
This doesn't bode particularly well for Pandora, the current leader in streaming music. In any case, investors were worried, pulling Pandora stock down by nearly 3% following the news. While the most popular streaming service in the U.S. has been doing a good job growing revenue, it is mainly reliant on advertising, and the company has been struggling to turn a profit over the last few years, losing approximately $36 million in 2012 and $41 million in 2013.
Apple's major acquisition
While adding music to the Amazon Prime service is an interesting move, the real buzz was generated when Apple announced it would be acquiring Beats. Apple paid around $3 billion for the company, valuing the headphone business at approximately $2.5 billion and the streaming music service at $500 million. The acquisition is the largest in the company's history.
The purchase of Beats is expected to restore some of Apple's "coolness" factor, which has been on the decline in recent years. The deal goes beyond buying the maker of trendy headphones and a streaming service; it improves the company's connections with the music industry and grants access to the creativity and clout of founders Dr. Dre and Jimmy Iovine. These connections will prove essential if Apple wants to regain its dominant position in the entertainment arena.
One way or another, the deal shows that Apple is serious about getting into the streaming music business, a segment in which it has not yet managed to capture significant market share. According to Apple, the Beats Music service will be operated alongside iTunes and iRadio, offering a full spectrum music listening options for consumers. Beats Music should allow Apple to make a smoother transition from offering music downloads, a business in decline, to music streaming, which is growing rapidly. Moreover, Beats Music would give Apple access to a wider range of operating systems, including Android. While Beats Music has only a fraction of the user base of rivals such as Pandora, Apple's huge reach should allow the service to grow quickly.
The bottom line
The streaming music industry is growing rapidly. Previously dominated by firms such as Pandora, a number of very large players in the tech sector are now looking to get a slice of the pie. Amazon.com will be adding streaming music to its Prime service, and Apple, with the acquisition of Beats, has made it clear it is also looking to get in on the action. While it remains to be seen whether these offerings will challenge the current leaders in an increasingly crowded space, the intention is beyond dispute.
Daniel James has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Pandora Media. The Motley Fool owns shares of Amazon.com, Apple, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. 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.