Last year, streaming services accounted for 10% of digital music revenues. That number ought to grow higher this year as subscription rates continue to grow much faster than the rest of the industry. The addition of Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) will surely add fire to the flame.
Google’s service isn’t particularly innovative or special. In fact, it doesn’t even pose that big of a threat to Pandora Media Inc (NYSE:P) or Spotify. It’s really more of a threat to Apple than any other company.
Why is Google really getting into music streaming?
Like a lot of things Google does, it didn’t get into music streaming for the money. Digital music is a very low margin business, and streaming is generally worse.
Pandora Media Inc (NYSE:P) captured 70% of the streaming internet radio market, grew its user base to over 200 million, and reached more listeners than widespread broadcast radio company Clearchannel, but still hasn’t turned a profit. The culprit is the company’s high cost of content.
Pandora paid out 55.9% of its revenue in royalty fees in 2012. Spotify is estimated to pay close to 70% of revenue. Comparatively, satellite radio pays an average of 9%.
Making a profit in streaming is not likely the goal for Google Inc (NASDAQ:GOOG) with All Access. I believe it’s a move to make its Android operating system stickier.
Google Inc (NASDAQ:GOOG) unveiled All Access by demonstrating it on an Android phone. The interface is clean and intuitive and echoes that of its Google Now feature. Interestingly, the service is not available for iOS or Windows Phone.
Creating loyal users
iPhone users are much more likely to purchase another iPhone as their next phone compared to the likelihood of Android users buying another Android phone. A survey last fall revealed that 22% of Android users planned to switch to the iPhone, while just 9% of iPhone users said they’d switch to an Android phone. While this survey was conducted just before the release of the iPhone 5, Apple’s brand loyalty is unparalleled.
Whether Google Inc (NASDAQ:GOOG) will extend All Access to non-Android devices remains to be seen, but in all likelihood development will focus first, if not solely, on Android. Compatibility and integration are ensured with a more closed system, which is sure to keep the user experience fantastic. And when users are paying $10 a month, the user experience better be fantastic.
Keeping the platform pay-only and Android-only would create more Android loyalty. It creates a higher switching cost for those thinking of defecting from the Android family. The longer someone uses the service, the less likely they are to unsubscribe as they’d be left with stale music from before they signed up for the service. For hipsters like me, that’s unacceptable.
The pressure is on Apple
Apple Inc. (NASDAQ:AAPL), not to be left behind, is also developing a streaming-music platform. The company has been a dominant force in digital music since it released the iPod and opened the iTunes store more than a decade ago.
iTunes captured 63% of the digital music download market last year, but growth in that market is slowing. The average iTunes user spent 40% less on music last quarter compared to the first quarter of 2011. And while digital music revenues grew 12% last year, subscription services grew 44%.
Apple’s product will inevitably create a stickier product ecosystem, but that’s not the goal for Apple. It already has an extremely loyal user base. Apple is actually fighting for more music revenue.
Google’s product isn’t particularly better than Spotify’s or its other competitors, but its reach is much greater with nearly a billion Android phones activated around the world. Similarly, Apple will rely on its 500 million itunes users to popularize its streaming model.
But Apple, more than Google Inc (NASDAQ:GOOG), will need to give users a reason to switch from Spotify, Pandora, or whatever streaming service its users currently subscribe to. These are the companies cutting into its music revenue and its image in digital music.
What to expect
Google Play Music All Access isn’t groundbreaking. It’s nothing that will completely change the industry or generate a ton of revenue for Google Inc (NASDAQ:GOOG). I see it as a service that will keep users loyal to the company – something it’s struggled to do compared to Apple.
Apple will release its own service too. Whether the product is evolutionary or revolutionary will be scrutinized and analyzed as more details leak. The pressure is on Apple to create a better product – a reason to choose them. It doesn’t have the first mover advantage this time around.
The article Why Google Started Streaming Music originally appeared on Fool.com and is written by Adam Levy.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
