The Motley Fool Questions Amazon's Music Strategy
July 1, 2014 at 4:28 AM (PT)
CHAD HENAGE writes for THE MOTLEY FOOL that, "while the big news recently is AMAZON.COM's new Fire Phone, there is another development that has quickly been overshadowed, and investors need to make sure they understand what is going on. AMAZON PRIME MUSIC is a service that fits the company perfectly; unfortunately, that's not a compliment. In fact, there are three reasons to believe PRIME MUSIC will be yet another money-losing business."
HENAGE explains, "in the music business, APPLE is still the 800-pound gorilla. The company's iTUNES business generates four times as much revenue in three months as PANDORA MEDIA expects to generate the whole year," and adds, "with millions of new iPHONES being sold every day, it's a good bet that iTUNES will continue to dominate when it comes to music, video, and apps. In addition, PANDORA may be smaller than APPLE's iTUNES, but the company took over 9% of total U.S. radio listening in the last three months. SPOTIFY is even smaller than PANDORA based on total active users, but the company reported over 10 million paid subscribers recently."
So what's wrong with AMAZON PRIME MUSIC'S business model? "The first reason PRIME MUSIC is destined to lose money is because it's tied to a $99 a year membership. Users have multiple choices for free unlimited streaming music, and even with advertising, PANDORA, SPOTIFY, iTUNES RADIO, and others are all popular."
"The second reason AMAZON PRIME MUSIC looks like a money-losing business is because streaming music isn't exactly a high-margin industry," adds HENAGE. "Even with a 37% gross margin, PANDORA lost money in the current quarter. AMAZON's gross margin last quarter was less than 29%. The extra potential cost to AMAZON for AMAZON PRIME MUSIC doesn't bode well for future profits."
HENAGE summs up, the third reason to believe PRIME MUSIC is going to lose money is that, "PRIME membership will have to grow in lockstep with increased usage in order to offset these additional costs. With so much competition, it's hard to imagine that happening. The bad news for investors is, AMAZON MUSIC looks like just another example of how BEZOS and company plan to take over another industry and lose money at the same time."