by : August 2014, Business

Amazon’s Hook

Amazon’s Hook

Earlier in June, Amazon officially launched “Prime Music”. This is a music-streaming platform for its  “prime” users only. Rival Spotify has a catalog of over 20 million tracks, but Amazon has delivered its service with only 1 million songs. In the meantime, while Pandora, iTunes Music, Rhapsody, and even Spotify focus on listener retention, Amazon has one of the highest rankings of paid subscribers. It is, after all, and despite its scant catalog, a commercial free service with a huge customer base to tap on. But TechCrunch has described Amazon’s interface as a “checkout maze” standing in the way of easy music consumption. The rankings, then, speak to the power of the retail giant over and above a somewhat subpar experience.

An ongoing advantage for Amazon, of course, is the integration of a one-payment transaction into their multiple services, including the Kindle Store and its own new release, the Fire Phone. Market share for the latter is still disappointing, though, as measured against the longer standing record of Apple or Google Android smartphones. But such integration between the mobile industry and music streaming bodes well long-term, as a long list of new partnerships suggests: Spotify with Sprint, Beats music with AT&T, and T-Mobile’s free-of-charge music streaming option offered after Deutsche Telekom closed deals with Spotify, Pandora, Rapsody, iTunes, Rdio, and others.  According to Nielsen, music download purchases have again showed a declining pace from early 2013 to mid2014, and this open window for streaming music is one that Amazon, like Spotify, TMobile, Beats, and Apple, seeks to exploit.

Pre-Production

Amazon entered the market immediately with 20 million users, and the negotiations preceding the launch of the service lasted at least half a year and involved all the major labels and some smaller ones. According to the New York Times, Amazon offered a royalty pool of $25 million for major labels and $5 million for small labels on a 1-year licensing basis. It did not, though, come to terms with UMG, whose catalog features at least a third of Billboard’s current Hot 100 and artists such as Maroon 5, Mariah Carey, Katy Perry, and Snoop Dogg. UMG bought a 20% stake of Beats in mid June for $520 million as Apple completed payment for its own stake in Beats, which explains why the major label held back in partnering up with Amazon, a rival.

But even without UMG’s catalog, Amazon is a force to be reckoned with. On the one hand, the probability of a service turndown because of this is low as it is a complementary service enhancing a bundle of paid benefits to users. Additionally, Amazon saved a big expense with UMG that the ecommerce great can use, presumably, to shore the bottom line of its music startup.

Strategy

In the meantime, Amazon will try and lure a higher percentage of active users in the US, estimated at 244 million, towards its prime accounts, a $99 per yearly subscription. Much of the early costs of the service, incidentally, are covered by subscriber fees, which increased to $99 a year from $79 in March, two months before the release of Prime Music.

The absence of pop music has not stifled Amazon’s music offering so far. This is a case of a high tech business that is already embedded in the lifestyles of the public at large that does not have to have all of its ducks in a row before committing to distributing music. Proof of this too is that the launch of Amazon’s service happened sooner than expected by the Music Business Journal last month.

Amazon is striving towards a curated playlist model, one where music compilations and promotions are meant to drive listener retention. Indeed, although more than 20 million tracks can be bought on their website, only 5% of those are used for the streaming service.

Conclusion

It is good to reflect once again that music may not be the driver of Amazon’s own music strategy. Music is certainly the hook that can engage customers into upgrading their accounts with Amazon, and for a large sector of Amazon buyers this may be good enough. But dedicated music fans will probably thirst for more content and the lackadaisical approach of the Internet giant is good only in so far as it diverts its existing customer base towards premium accounts. This is an older demographic and if music discovery or projection of new genres does not interest this group, the expansion of the service could run against a natural roadblock.  Music consumers are impulse buyers of hits, perhaps, but nothing else. It takes a dedicated music service to attract the larger market of music aficionados.

By Felipe González

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