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Competitions Grows Hotter as Google Joins Music Streaming War

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Shares of Spotify (SPOT - Free Report) and Pandora (P - Free Report) both opened lower on Thursday after Google (GOOGL - Free Report) announced that it will roll out a YouTube-based music-streaming service. In doing so, the technology giant joins an already crowded space, complete with some of the biggest names on Wall Street. Let’s dive into the current streaming music landscape to gauge not only how things stand now, but what the market might look like down the line.

YouTube

Google announced Wednesday that it will launch YouTube Music on May 22. The service is set to feature a “reimagined mobile app and brand new desktop player… thousands of playlists, the official versions of millions of songs, albums, artist radio and more, in addition to all the music videos people expect from YouTube,” according to a company press release.

There will be a free, ad-supported version as well as YouTube Music Premium, which will cost $9.99 a month. Current Google Play Music subscribers will get a free membership. Google will also introduce a new YouTube Premium—which will include YouTube Music Premium.

This service will cost $11.99 per month and replace YouTube Red—the company’s current paid subscription-based offering that removes ads, offers additional content, and allows users the chance to download.

YouTube has long been a platform where millions of people listened to music and watched music videos. But only time will tell if the company’s new music-focused service will be able to compete against the likes of Spotify and fellow tech powers.

The Streaming Music Industry

Spotify, which went public in early April, is one of the vanguards of the premium streaming music scene. The company helped redefine an industry that many thought was doomed based on the prevalence of illegally downloading music.

Today, the music business is better off than it has been in a long time, with record labels making money through streaming royalties that they weren’t in the early 2000s when people stopped buying CDs.

Spotify currently boasts 170 million monthly active users, which are broken down into two categories: premium and ad-supported. As of the end of the first quarter, Spotify claimed 99 million ad-supported users along with 75 million paying customers—premium accounted for over 90% of total revenues in Q1.

The company’s premium users climbed 45% from the year-ago period, outpacing the free version’s growth of 21%. Spotify premium cost $9.99 a month, with a $14.99 a month family plan available. 

At the moment, Spotify is the most dominant player in the paid, premium music streaming world. Meanwhile, Apple’s (AAPL - Free Report) much newer Apple Music reported 38 million subscribers—however, CEO Tim Cook recently noted the service has 50 million users including people on free trials. Apple’s service also costs $9.99 per month and offers a family plan at the same price point as well.

The sometimes forgotten Pandora claimed 72.3 million active listeners at the end of the first quarter. Pandora offers three levels of service: ad-supported radio, personalized radio with no ads—$4.99 a month—and premium—$9.99 a month. Pandora noted that its plus and premium subscribers totaled just 5.63 million.

And not to be forgotten, Amazon (AMZN - Free Report) also has a premium streaming service called Music Unlimited. This service is currently separate from Amazon’s widely popular Prime service that includes free shipping and access to its streaming movie and TV content. Music Unlimited costs $7.99 a month for Prime members and $9.99 for non-prime members.

In somewhat typical Amazon fashion, user data isn’t currently available, though it did note recently that the service has “tens of millions" of paid customers.

What’s Next

Investors can clearly see that all of these premium music streaming offerings currently come in at almost exactly the same price point. Therefore, going forward, some of the companies will likely try to attract more customers by offering a lower price.

This means investors might be nervous about the longevity of Pandora and even Spotify, despite its outsized user lead. The reason might not seem obvious at first but it becomes clear pretty quickly.

Spotify and others currently have to pay a lot of money for the rights to music from the major record labels, including Universal Music, Sony Music, and Warner Music. Spotify simply runs a very low margin business and it is hard to imagine that changing without some major shake-ups to the music business. The record labels do need the Spotifys and Pandoras of the world, but not as much as the music streamers need them.

Netflix (NFLX - Free Report) was able to take control of its future by creating its own movies and TV shows after the company saw its current content partners slowly pulling out to start their own services. Spotify will have a much harder time becoming its own record label.

With that said, the smart money might be on Google, Apple, and Amazon dominating the music streaming world one day simply because they have the money to do so.

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