Google (NASDAQ:GOOG)(NASDAQ:GOOGL), with its new interest in automation and recent purchase of radio service Songza, is taking aim at the "smart music" market, where the Android platform can be used on multiple devices like cars and wearables. The goal is to bring customers the music they want, before they even ask for it. This market may be new, but music streamer Pandora (NYSE:P) has also expressed interest, as has Apple (NASDAQ:AAPL) with its Beats acquisition.
Throughout the home
A recent interview with Pandora's vice president of business development, Ian Geller, pinpoints the rising goals of spreading music throughout the house. Geller notably mentioned "defragmentation in the smart home," or the proliferation of smart devices in the residential Internet of Things -- a trend that gives both Pandora and Google more opportunities to offer their music apps not only in the living room, but in the car, kitchen, bedroom, and bathroom. More devices means more listening hours, and more potential for profits.
Nielsen's semi-annual study of U.S. music has offered evidence supporting the rise of streaming music, showing that the first half of 2014 was dominated by a rise in on-demand music streaming, which grew by 42% from the first half of 2013, while digital music sales fell in the same time frame.
However, the key adjective in the study is "on-demand," the ability of music services to provide listeners with the exact songs they want to hear, something that services like Songza noticeably lack.
Personalization vs. connectivity
Songza drew attention for its focus on smart music, using prediction services like its Concierge feature to provide listeners with the right playlists at the right times, forecasting moods and tastes based on past behavior. Beats has algorithms that perform similar recommendation tasks. These services fit well with Google's conquest of the Internet of Things, where Android devices can note your actions and offer you personalized music (via phones, TVs, cars, refrigerators, etc.).
Here, Pandora has a chance to differentiate itself; while the music streamer wants to expand into smart homes, it seems more interested in connectivity than personalization. Plus, personalization does not appear to be a major selling point, according to the Nielsen data. The high growth rate of on-demand services points to consumers' interest in searching and picking out their own music, not depending on special algorithms to choose a playlist for them. Not only does could music personalization raise privacy concerns, but it also could keep listeners bound to set playlists based on what the apps think they want, which wouldn't be a conducive atmosphere for finding new music or following the latest releases from favorite bands.
Songza and Beats suffer more from this problem than Pandora, which is concentrating on connectivity while letting listeners make their own decisions about playlists. Even more on the nose is Spotify, which allows users to listen to specific songs on demand, or discover new music based on their past activity.
An on-demand world
Currently, the avowed interest in smart music for the Internet of Things stands to benefit Pandora the most, with its solid 77 million active users and its intent to focus on multiple devices, minus potentially heavy-handed personalization tactics. Its financial growth, with a gross margin leap from 17% in the first quarter of 2013 to 37% in 2014, is a positive indicator. But, investors looking into the Internet of the Things and the continued evolution of streaming media should keep on eye on Spotify's purer on-demand model, which could offer both competition and inspiration in the coming year.
Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (C shares), 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.