Market Insight

Amazon adds music to Prime Subscriptions

June 16, 2014  | Subscribers Only

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Amazon has launched an on-demand music offer as part of its Prime service. Limited to the US at launch, Prime Music joins Prime Instant Video, ebook lending, and free shipping as part of the retail giant's bundled subscription offer. The service offers on-demand access to a catalogue of a little over 1 million tracks at not extra cost to consumers. Much of the catalogue is made up of titles over six months old, effectively bringing a windowed approach to Amazon’s combined music offer. This echoes its approach in video where new releases are generally available to buy and rent, and older content is available as part of a Prime subscription.

Prime Music launches with titles from Warner Music, Sony Music and some independents. Universal Music, which had almost 40% of the US market in 2013, is a notable hold out.

The on-demand service integrates with a user's existing Amazon music library, which already included digital music purchases and, licenses permitting, digital copies of CDs that the user has purchased from Amazon.  It is available through the web as well as Amazon's music apps for iOS, Android and its own Kindle Fire devices.

Our analysis

There have been some very deliberate decisions about the composition of Prime Music, and the result is a service which is unlike anything else on the US market. To understand the service it is important to recognize what is not and what it is unlikely to become, before assessing its future.

Prime Music is not a competitor to Spotify, Beats, or, in its current guise, Pandora.  We believe this for a mixture of catalogue and user experience reasons:

  1. Catalogue:  The catalogue restrictions on Amazon’s service mean that it is not an adequate substitute for Spotify, Rdio or Beats users who are used to a broader, newer, and more complete offer.  Prime Instant Video's evolution suggests the music service will start with a relatively small offer and grow with time.
  • However, it should not be taken from this that Amazon is going to be offering a Spotify-like 20 million tracks in the immediate future. The major on-demand music services typically have a monthly fee of $9.99 per subscriber of which 65-70% goes to rights holders. In other words, operating on the conventional on-demand subscription model would add more than $6.50 per subscriber per month to the monthly cost of Prime for Amazon. This is equivalent to almost 80% of the consumer revenue that Prime directly brings in from consumers, even at its new $99 per year cost. This makes it unlikely that Amazon will adopt a full Spotify-like model in the near term as Prime already has to cover: free shipping; ebook lending; and Amazon’s increasingly high profile, high cost video library (e.g. in April 2014 Amazon signed a three year deal with HBO that is reputed to be worth more than $100m per year). Early reports suggest that a Spotify-like, wide ranging, high cost deal is exactly what Amazon was seeking to avoid by targeting older titles and offering labels a fixed pot of money to cover content costs.
  1. User experience: Compared to services like Pandora or Slacker the user experience of Prime Music is built around retail, more than listening.  Prime Music permeates Amazon’s digital music store, search for a track and the store will show it to you, either with the option of buying it or, when available as part of Prime playing it or adding it to your library. The result is a service that makes a feature of its catalogue gaps as a way to drive sales.
  • Prime Music is set up as an active listener experience, consumers pick tracks, make playlists and browse, but the service looks crippled in comparison to a true on-demand offer where you can pick and choose from a far larger library of music either for free, on an ad-funded basis, or at no incremental price. Compared to Spotify or Beats, Prime Music looks like in-store radio for the digital age. But where those services have increasingly been developing more radio-like experiences to engage users the initial version of Prime Music remains solidly retail and on-demand focused.
  • The increased focus on radio-like experiences from the major standalone on-demand services suggests an interesting route for future versions of Prime Music as its catalogue size is comparable to Pandora’s, and while we expect Prime’s catalogue to grow we don’t expect it to become Spotify-like. Pandora offers a ‘lean back’ experience, which allows it to work around the catalogue restrictions by providing users with a constant stream of content they will probably like. In this environment pure catalogue size matters less than the seamless experience of having something to listen to. Pandora’s active catalogue has been less than 1 million tracks for many years but it has over 75 million active listeners. Consequently it would not be surprising if Amazon adds more radio-like functionality to Prime Music in future versions. However any such additions will have to balance attracting users and service stickiness with a model which drives purchases. iTunes Radio’s 40 million users demonstrates that attracting users is one thing, converting them to paying customers is another matter. Although for Apple driving music purchases is arguably less of a strategic priority than it is for Amazon as the Cupertino-based company uses content to drive high margin device sales.

Ultimately Amazon is walking a strategic tight rope with Prime Music. The company is trying to add more value to its Prime Subscriptions by including music in its bundled offer, but that music offer cannot offer the same rich catalogue as services like Spotify because of the costs involved; and must tread a delicate balance if it is to become a successful radio offer which ties into Amazon’s digital music store.  There are good business reasons for this approach and we expect Amazon to keep improving Prime Music; but the restrictions of the current offer mean that the initial version of Prime Music may well turn into a service in search of a user.

North America USA
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