- Amazon is entering the crowded and competitive music streaming space.
- The service will be quite different from that of its competitors.
- Amazon could see some short term upside. We're bearish on the long term.
Amazon (NASDAQ:AMZN) might soon add to the suite of services it offers under its Prime membership. As per reports by BuzzFeed, Amazon is venturing into the music streaming business with the launch of a yet-unnamed service in the current quarter. While music streaming is a crowded space, Amazon is approaching it with a model that differs from that of its competitors like Beats Music and Spotify.
Most significant players in the music streaming space attempt to offer pretty much every music track under the sun. Amazon’s service will offer its listeners a select set of tracks which it will license at a discount. Further, it will only offer music that is at least 6 months old. The service is expected to be similar to Amazon’s ‘Prime Instant Video’ which offers on-demand videos to its ‘Prime’ service subscribers.
More importantly Amazon’s approach saves itself a big chunk of the content acquisition costs that are incurred by its competitors in this space. At the moment, this doesn’t come across as a vertical in which Amazon wants to replicate the dominance it has established in its retail business. On the contrary, it appears to be a strategy to pacify its ‘Prime’ members. Amazon hiked its Prime membership fee in March 2014 by $20, raising the fee to $99.
As per BuzzFeed’s report, Amazon has entered into agreements with two major labels, namely, Sony Music and Warner Music apart from the several others. It is also believed to be in discussions with Universal Music. The agreements will allow Amazon limited access to content which it will pick from, an arrangement similar to its deal with HBO which we covered a few days ago.
The music streaming space has been buzzing in the last week to ten days with Apple’s (NASDAQ:AAPL) $3 billion acquisition of Beats Music. Apple is also believed to be mulling the launch of a service like that of Spotify. Music has been an integral part of Apple’s product suite with iTunes and iTunes Radio. Apple’s recent activity in this space coincides with Spotify’s announcement of clocking 10 million paid subscribers.
During the same period, Twitter (NYSE:TWTR) was reportedly mulling the acquisition of Soundcloud after the former shut down its music app about a month ago. The microblogging site is now believed to have shelved the idea. As per our estimate, Soundcloud has about 50 million unique visitors globally and about 12 million in the US.
The retail giant’s foray into music streaming may not impact its revenue in the immediate future, since it is adding the service to a set of offerings that are already being paid for. However, the platform might develop potential to monetize users as it evolves. Amazon’s ‘Prime’ had about 20 million members as on Jan 2014 which could be handy, should the company proceed in that direction.
As we had discussed in our recent coverage of Amazon, after the correction, the stock valuation in Price/Sales terms has hit a two year low. Going by the stock’s historical performance from such lows, a short term upside in stock price could be on the cards.
However, we continue to remain bearish over the long term given the company’s top-line focus, as opposed to an earnings focus. As a result of the same, at a P/S of 1.84, Amazon may not seem expensive. However, priced at $309 a share, it’s not attractive at a Price/Earnings multiple of 496.
Our analysis of the stock assigns it a rating of 1.9/5 at its current price.
To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)