For an industry that has such a hard time making money, digital music sure is hot right now. Everybody wants in. Amazon is now the latest tech giant rumored to be eyeing a slice of this increasingly tempting pie, according to a report on The Verge. But why?
News that Amazon is in negotiations with music labels comes mere weeks after Google was revealed to be having similar discussions of its own. The search giant already has a huge presence in digital music thanks to YouTube, but seeks to solidify its role by launching a Spotify-style subscription service on top of its existing music products. Like Google, Amazon already has content relationships and infrastructure in place that will simplify the process of entering what is typically a very challenging and cost-prohibitive marketplace.
It will still be an expensive endeavor, given the high cost of licensing music from the major labels, but companies like Google and Amazon are well-positioned to negotiate those dollar figures down and, if necessary, operate at a loss without discernibly denting their bottom line.
Fine-tuning the financial details is what these negotiations are all about. And it's important to note that they are just that: negotiations. They could wind up hitting a roadblock, as has allegedly happened with Apple in its rumored quest to launch a Pandora competitor. However it pans out, it's now known that Google and Amazon are at least attempting to enter the streaming music space. If all goes according to both companies' plans, they'll soon be in direct competition for digital music subscribers.
Google vs. Amazon: From Frenemies To Rivals
The rivalry between Google and Amazon is expected to heat up this year, and this would just be the latest source of competition between the two companies. While they started as two very different, seemingly unrelated businesses, the companies have both evolved into new territories, occasionally bumping into each other in the process. Today, both companies sell digital content like ebooks and music, as well as the hardware required to read and view that content. Like Google's arch nemesis Apple, Amazon is now rumored to be building its own mapping service as well.
Digital music is not an easy business to be in. Six million people are now paying for Spotify, with 18 million more listening for free on the desktop. That's stellar growth in just under two years and an impressive conversion rate for any freemium business. Still, Spotify isn't touting massive profits, and nor are any of its competitors.
That's because they're all paying a massive chunk of their revenues to rights holders (record labels, mostly) and struggling to find ways to drive those costs down. Pandora's legislative efforts haven't met with much success on that front.
Why Streaming Music?
A company like Amazon might be able to use its might to negotiate better licensing deals. Even if it fails to do so, running an unprofitable streaming service (or bundling music with Prime) could rope enough additional people into Amazon's ecosystem to make the effort worthwhile.
Or, if nothing else, it could prevent Google from getting a leg up on Amazon in the broader digital music space, in which both companies are already present. In an excellent post, The Verge's Tim Carmody points out that "few of these larger tech companies embracing streaming music seem to be doing so as an affirmative strategy, because they ultimately believe streaming music will help sell their other devices or services. Instead, they're primarily worried that if they don't offer a streaming music service, they'll be seen as deficient in some way."
It's also worth keeping in mind the mobile aspect. Google's stake in mobile is obvious, and Amazon's is expected to get even more serious if, as expected, the company eventually unveils a smartphone of its own. As Wired's Mat Honan wisely points out:
Subscription and streaming only took off once 3G made it possible for you to carry your music with you everywhere. Pandora, Spotify, and Rdio have proved there’s an attractive market. But imagine what happens when a streaming-music app ships with your phone, with every phone, and all you have to do is turn it on, using an account you’ve already set up for billing. Or even worse (if you are an existing streaming-music provider) if it’s a free, advertising-supported service.
All this action in the streaming music space leaves little doubt that this model will be a crucial component of how we consume music in the future. It's the "music like water" model that music futurists once dreamed about. Exactly how it takes shape will depend on economic questions: how the business model evolves, how artists get paid, which companies will dominate distribution.
This year was already poised to be an interesting one in digital music with the impending U.S. launch of Deezer, the arrival of Daisy and ongoing rumors about Apple's plans to build a Pandora competitor. Now Google and Amazon are also both gunning for Spotify.