I previously estimated Spotify could capture over 50% of the entire music industry's revenue within five years. I decided that's a reasonable conclusion even with a growing number of deep-pocketed competitors in music streaming.
Spotify's biggest competitive advantage is its scale, which allows it to develop a better user experience thanks to its troves of data, similar to how Netflix uses its data to keep users watching. That scale produces a virtuous cycle, attracting and retaining users and increasing the platform's scale.
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Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) are aiming to disrupt that cycle by putting music streaming at the center of their devices. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google is planning to use YouTube's popularity as a launching pad for a premium subscription service. Pandora (NYSE: P) has been in music streaming longer than practically anyone, and has a lot of music and listener data to integrate into its new on-demand services.
But none of them pose a serious threat to Spotify's continued user growth.
Apple Music is tied to the iPhone
Apple Music is set to overtake Spotify in the U.S. in terms of paid subscribers in the near future, if it hasn't already. Apple has done an excellent job of getting users to subscribe to its service, and growth appears to be accelerating with the release of the third-generation Apple Watch with an LTE connection and the HomePod smart speaker.
But Apple Music is ultimately tied to Apple's device sales. And Apple's share of smartphones is significantly higher in the U.S. than it is in the rest of the world. While Apple enjoys about 45% market share at home, it captures less than 20% of the market globally. As long as the smartphone remains people's primary music listening device, Apple likely won't be able replicate its level of success outside the United States.
Amazon just wants to sell more Echos and Prime subscriptions
Amazon offers a limited streaming service as part of Prime, but it also offers a premium service. Prime members can subscribe for just $8 per month, and if they're willing to listen exclusively on their Echo devices, subscribers can pay just $4 per month.
But Amazon's goal doesn't appear to be to make up for lost revenue from digital downloads. Instead, it wants more Prime members and more Echo owners, as those groups ultimately spend more on Amazon.com. To that end, Amazon has opened the Echo to hundreds of third-party apps, including Spotify, welcoming the streaming platform on its device. That stands in contrast to Apple's HomePod, which only supports Apple Music.
Google already owns the largest free music-streaming service
YouTube, in all likelihood, streams music to more people than Spotify. It has over 1.5 billion active users streaming an average of over 1 hour of videos on mobile per day. It's a good guess that a lot of that mobile streaming is music -- just look at its most viewed videos of all time.
Google has tried twice to launch a paid streaming service, but hasn't attracted much of an audience so far. It's planning yet another launch in the near future, targeting heavy music listeners on YouTube. YouTube head of music said it's going to start inundating people that stream a lot of music with ads for its paid service.
Google's past missteps do not inspire confidence, however. And YouTube's music listeners are often there to stream music for free. Making them sit through more ads for a paid service is more like to drive them to Spotify, in my opinion, than it is to convince them to pay for a subscription.
Pandora is trending in the wrong direction
Pandora was an early innovator in streaming music, but it was late to the game in on-demand streaming. The company launched a premium streaming product about a year ago, but it hasn't moved the needle much. Pandora's subscription listeners climbed from 4.39 million at the end of 2016 to 5.48 million at the end of last year. In comparison, Spotify added 23 million paid subscribers during the same period.
Moreover, Pandora's free listeners fell from 81 million to less than 75 million over the past year. And Pandora's listeners are concentrated in the United States.
While Pandora has a lot of listener data, it hasn't shown an ability to leverage the data to create a product that attracts and retains subscribers like Spotify does.
Spotify's game to lose
It doesn't seem like there's much standing in the way of Spotify attracting more and more listeners as customers shift their spending from physical and digital purchases to subscriptions. The biggest challenge for Spotify to overcome may, in fact, be the record labels themselves, to which Spotify pays hefty royalties.
But record labels have shown an increasing willingness to play ball with Spotify, as it has grown to over 150 million listeners, and the bigger Spotify gets, the more negotiating power it has. Spotify's most recent round of negotiations is already showing up in its bottom line, and management expects to see continued improvements in margin over the next year.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.