Facebook Could Be Preparing to Enter the Streaming Music Market

The streaming music market could grow from $1.4 billion in 2015 to $14.1 billion in 2030, according to Goldman Sachs' Music in the Air report. That would represent a third of the entire music industry's revenues at the end of the period.

Discussions about the streaming music industry usually focus on companies like Spotify, Pandora Music, and Apple Music. But Facebook's (NASDAQ: FB) recent deal with music licensing group and copyright database ICE Services indicates that it might also want a piece of the pie.

Getting its ducks in a row

ICE handles the copyrights of 31 million works of music from 290,000 rights holders, and represents three copyright groups -- PRS in the U.K., STIM in Sweden, and GEMA in Germany. Through the deal, which covers 160 territories, Facebook will pay ICE royalties every time its music is broadcast on its social network, Messenger, Instagram, or Oculus virtual reality platform. The financial terms of the deal were not disclosed.

This isn't the first time Facebook has paid for music rights. Last September, it reportedly paid "hundreds of millions" of dollars to major record labels and publishers to let its users add copyrighted songs to their uploaded videos.

Facebook has subsequently announced licensing deals with Comcast's Universal Music Group, Sony/ATV Music, Global Music Rights, HFA/Rumblefish and Kobalt Music Group. It also introduced a Sound Collection feature, which lets content creators add no-name music to their videos. All of these agreements seem to be natural steps a company like Facebook would take before jumping into the streaming music market or expanding its video ecosystem.

But it's not as easy as it seems

Entering this market would be a natural next move for Facebook, which is already challenging Alphabet's YouTube in the streaming video market with its Facebook Watch feature.

After all, the social network finished last quarter with 2.1 billion monthly active users, while Morgan Stanley reported that 40% of its U.S. users already watch videos on Facebook Watch every week.

But making the jump from video to streaming music isn't that simple. Last July, Billboard reported that YouTube Red and Google Play Music -- Alphabet's two big plays on the paid streaming market -- had a combined subscriber base of just 7 million. That's a paltry figure compared to the "over 1 billion users" YouTube claims to reach.

Spotify has over 70 million paid subscribers, and Apple has 36 million subscribers. Pandora has almost 75 million active listeners, but only 5.5 million paid subscribers. If Facebook wants to go head-to-head against these market leaders in streaming music, it could suffer the same fate as Google Play Music.

It's possible Facebook might simply want to integrate free streaming music into its apps. If that's the case, Facebook might expect to offset the royalty fees with ad revenue. But as Pandora's lack of profitability demonstrates, an ad-based strategy is far less sustainable than a subscription-based one.

Facebook often stumbles outside its core competencies

It's unclear if Facebook plans to enter the streaming music market. However, investors should note that Facebook often stumbles when it expands beyond its core social network.

It attempted to challenge Amazon with its own e-commerce platform, and tried to disrupt Android with HTC's curious Facebook Phone and the Facebook Home launcher. Those efforts flopped. Facebook also tried to disrupt the mobile app market with chatbots, but they only proved that AI bots weren't reliable replacements for apps. And M -- Facebook's answer to Siri and Alexa -- was also recently axed for similar reasons.

These failures don't necessarily mean that "Facebook Music" will suffer a similar fate. Facebook seems to have the right pieces for launching a successful streaming music platform, but its success would depend on how well it puts those pieces together.

10 stocks we like better than FacebookWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Facebook wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

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. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short March 2018 $200 calls on Facebook, and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.