Just a few years ago, streaming music was a niche product, but in 2014 it's gone mainstream. Beats entered the market with Beats Music, which prompted Tim Cook to purchase the company in Apple's (NASDAQ:AAPL) largest acquisition ever. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) saw so much music streaming activity on YouTube that it decided to roll out a full-fledged music streaming service on the platform last week.
In the first half of the year, on-demand music streaming increased 42% year over year. As more competitors fight for subscribers, Apple and Google have a distinct advantage over the competition: They control people's primary music players.
Bundling music apps with the mobile OS
Apple and Google exercise immense control over what apps come preinstalled on about 94% of U.S. smartphones. While Google's pre-loaded app policies have landed it in a bit of trouble this year, it's done nothing to stop it from requiring Android licensers to load up to 20 Google apps on their Android devices.
Google already requires OEMs to pre-load YouTube onto devices, and now the new music streaming service built into the app is featured front and center when users boot up the app.
A report from the Financial Times on Wednesday suggested that Apple is looking to bundle Beats Music into an iOS update early next year. (One can only hope it won't be as difficult to remove as that U2 album.)
Both Apple and Google are in positions to get their product in front of hundreds of millions of users at almost zero marginal cost. That's something Spotify and Rdio could only dream of.
Dominating smartphone real estate is a strategy that works. That's why Google has 20 apps it wants OEMs to pre-install and Facebook has about a dozen apps available to install. Simply staking out a spot on users' phones keeps the product on their mind and increases engagement.
Offering a better user experience
On top of easily getting their music streaming apps on users' phones, Google and Apple are in a position to provide a better user experience than Spotify or any other competitor. Both are in a position to integrate their subscription streaming services more closely with the mobile OS.
Third-party apps are limited in how they can interact with the user interface of iOS and Android. While Apple recently made it easier for apps to communicate with each other with Extensibility, music streaming apps still lack a lot when it comes to how users actually listen to music.
For example, with iTunes Radio users are able to favorite and buy songs from the lock screen. Other music apps only allow users to pause or skip a track or adjust the volume. Additionally, Apple's Music app is integrated with Siri, while other music apps aren't. The addition of song identification in Siri could funnel a lot of listeners to Beats Music.
Why investors should care
While digital music represents a small piece of Apple's and Google's revenue, music is tied deeply into Apple's culture and Google owns the biggest music streaming site in the world with YouTube. Both are interested in defending their stakes in digital music.
IFPI reported that subscription music streaming revenue grew more than 51% in 2013, topping $1 billion. Spotify, with its 12.5 million paid subscribers, is expected to top $1.5 billion on its own over the next 12 months. The music industry as a whole is currently worth approximately $15 billion, which is a market that streaming services are rapidly gaining share of, if not increasing its size.
There's a massive growth opportunity ahead for music streaming subscriptions. Even for Apple and Google there's a lot to gain by increasing their subscriber bases for their respective music streaming services.