Business Matters: How Amazon Could Have ‘Tens of Millions’ of Paid Streaming Music Subscribers Instantly

After nearly a decade and a half of buildup, streaming music services are finally poised to make the leap from niche market to mainstream acceptance. That leap is likely to coincide with the introduction of new services by large, diversified tech companies, rather than venture capital-backed music specialists such as Spotify that have largely built the market thus far. With its well-established user base, Inc. may be the first, with the ability to deliver a streaming service to tens of millions of users instantly.

Last week’s leak of an Amazon music licensing contract (posted on Digital Music News) made explicit mention of the Seattle-based retailer’s plan to launch a subscription service, possibly as soon as later this spring. Details remain scant, but the document suggests that Amazon plans to bundle streaming music with its other services -- likely including Amazon Prime, its annual subscription program that gives users free two-day shipping from its online store along with unlimited access to a rotating catalog of streaming videos and a virtual lending library for books.

That’s bad news for the many standalone services that have appeared over the past several years: Spotify, Beats Music, Rdio, Deezer, and comparative granddaddy Rhapsody, launched in 2001. (These on-demand services differ from Pandora, which doesn’t allow users to choose specific songs and pay substantially lower royalties.) As each service has added new features, arrived in new territories and converted free users to paying customers, signup rates have accelerated. Not every company releases subscriber numbers, but Spotify is generally assumed to be the leader; it claims at least six million paying customers among 24 million active users (although it hasn’t released updated figures for a year). At $10 a month, most digital music subscribers pay roughly $120 each year for desktop and mobile access, though plans and territorial prices vary.

But if Amazon, for example, were to bundle a music service with its Prime memberships, whose price recently increased from $79 to $99 annually, the retailer would instantly rank among the world’s largest on-demand music services. Amazon won’t say exactly how many Prime members it has, but in a December statement, it claimed “tens of millions,” with the plural number suggesting at least 20 million. That would be more than three times Spotify’s paying customer base, and in the ballpark of its total (free and paid) user base, per its March 2013 figures. Amazon has also said it added “millions” during the third quarter of 2013 alone.

By bundling product shipping, video, and music together, Amazon can deftly hide the price of each of the services from consumers, encouraging them to buy all instead of none -- and overcoming signup barriers music services have always faced. (Bundling has stimulated subscriber growth in the past, most typically via mobile deals.) If Amazon can strike deals with record labels and obtain rights to a library of about 20 million songs as other streaming services offer, it may also be able to absorb content acquisition costs at a lower price per consumer. 

While most music subscribers are big music fans, not every Prime customer will use the service for music. Power users will get their money’s worth, while people who don’t listen to a lot of music will still throw cash into the till, funding the royalty pot passively. Think of cable consumers who continuously pay for hundreds of channels they never watch -- not to mention Amazon Prime subscribers themselves who don’t watch the videos or borrow e-books. (Amazon may have other plans in mind, including compensating content owners with a fixed pool of cash in exchange for a limited music library. The company did not respond to a request for comment for this story.)

Even if it raised Prime’s price again -- say, to $120 a year -- a typical Spotify subscriber might be encouraged to switch, since Amazon also offers the free shipping, video and lending library features along with a comparable music service. Besides, Amazon Prime is already thought to be a loss leader, where the company makes up for its losses on shipping costs by turning casual Amazon customers into frequent buyers. Music could be just one more feature that encourages people to subscribe.

It’s a sign of a maturing market when change isn’t driven by upstarts with new ideas, but rather established companies that turn well-tested concepts into mainstream products. In some corners of the tech industry, maturing markets lead to consolidation that builds user bases -- something standalone services have endeavored painfully to do on their own. But for a company the size of Amazon, its user base is already well-established. And some of its Prime customers might not even know how much they’ll enjoy a music subscription, until Amazon gives them one.