MorningWord 10/12/16: Alexa… Destroy Spotify

by Dan October 12, 2016 9:38 am • FREE ACCESS wants to eff up the streaming music business the way it has almost every other business it has entered. Their “business” model when they enter a new market is not too focused on such mundane things like profitability. They focus on marketshare, expanding the usefulness of existing services (and now devices/ platforms like Echo) and ultimately make through Prime membership that much stickier. Many companies have loss leader product, that reels in customers and hooks them into an ecosystem that allows them to make money on their main products. Almost all of Amazon’s products are loss leaders, and investors have continually rewarded them over the years as they price other companies out.

The pricing of the Music plans is clearly a shot across the bow at incumbent streaming leader Spotify, and upstart Apple Music.


Last month I detailed subscription and pricing for Spotify & Apple Music as it relates to Pandora:

To put their (Pandora’s) expected 2016 sales of $1.4 billion in some context (on 78 million active user base, assuming 9 to 10 million paid), Tim Cook last week announced that their streaming music service, Apple Music likely has 17 million subscribers. Assuming that the average is $11.50 a month (single sub $9.99-month, $99 annual, family is $14.99/month), that amounts to close to $2.5 billion for annual subscription revenues.

Spotify, who is the leader in subscription streaming, with 30 million paid, and 70 million ad supported are the 800 pound gorilla in terms of scale, so if Pandora is able to reduce churn and actually gain share on Spotify they could become a fairly valued property target by bigger media companies.

I suspect that Amazon has gone down the build vs buy route when it comes to music, as it feels its nearly 50 million Prime members are increasingly likely to add services like music, movies, ebooks, magazines, and Twitch to name a few.

I guess the most important take-away here is that while companies like Apple who desperately search for new revenue streams in digital services (to grow sales off of a $215 billion base in 2016 (which is down from $234 billion in 2015)), may end up doing it a lot more unprofitably than they originally hoped due to Amazon’s being in the same business and willing to lose money.

For those who are pinning AAPL’s return to double digit sales growth on the back of Services, I would not hold your breath in fiscal 2017. Lets run through the last 4 quarters for Services (which includes Music & Pay) yoy sales growth and percentage of the whole:

-Fiscal Q3’16 services grew 19% yoy, equaling 14% of their $42.35 billion in sales,

-Fiscal Q2’16 Services grew 20% yoy, equaling 12% of their $50.5 billion in sales,

-Fiscal Q1’16 Services grew 26% yoy, equaling 8% of their $76.8 billion in sales.

-Fiscal Q4’15 Services grew 10% yoy, equaling 10% of their $51.5 billion in sales.

Not exactly gangbusters.

For the time being, Amazon seems content in acting like a disruptive startup who doesn’t care if they make money while they build market share. Rather than burn through venture capital to do so, they use the public capital allotted to them for growth initiatives, which equals $87 billion in added market cap this year, despite only booking $1.7 billion in GAAP net income on $92 billion in sales in the first three quarters.