How Amazon Can Benefit From A Cheap Music Subscription For Echo

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Amazon‘s (NASDAQ:AMZN) personal assistant and streaming device Echo has registered sales of nearly 4 million units since its launch in late 2014, and the company has set a target to sell 10 million Echo devices by next year, which will make it a $1 billion hardware business for the company. According to CIRP’s research, customer awareness of the product reached almost 50% by the end of last year and Amazon is now looking at innovative ways to attract users to the device. Reports suggest that the company is launching a music subscription service, which would be priced at $10 per month.  However, a version that would only work on its Echo hardware would cost half of the regular streaming service, ort $5 per month. The company currently offers Amazon Music to its Prime customers who can stream a limited catalog of music for free.  Amazon’s Prime Music library is limited, since the company struck deals with labels offering a discount. However, launching a paid music streaming service can enable Amazon to enhance this library and recover content acquisition costs through the two subscription models and potentially offer Prime members a larger music library for free, in addition to boosting sales of its Echo device.

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Making Echo The Next Revenue Driver

Electronics, general merchandise and media (books, DVDs and music) are the key products driving Amazon’s e-commerce revenues, at present.  Among them, its Kindle hardware revenues should reach around $2 billion in 2017 and grow steadily thereafter, in our estimation. If Amazon achieves its sales target for Echo, it will become a key hardware revenue driver for the company as well. Charging for music subscriptions on Echo can also allow Amazon to offset the cost of free music subscriptions it already provides.  It also can potentially include the enhanced library for free to its Prime Members. While Prime members are key revenue drivers for Amazon, the company incurs substantial costs in providing premium benefits to attract and retain members. And this has an impact on margins and profitability.  So an innovative way to cover for these expenses should improve Amazon’s profitability.

A standalone music streaming service along the lines of Apple and Spotify will allow Amazon to enhance its music streaming library, since the content acquisition costs could then be recovered. Whether the company will continue providing this service free to Prime members in entirety is not yet clear.  However, this can come as a huge perk for these members, thus driving growth in Prime memberships. Furthermore, providing this subscription at a lower cost to Echo owners can also boost sales of the device.  The challenge Amazon faces in providing an “Echo only” service is whether users who usually play music on their mobile devices would be convinced to buy a service which works only on “Echo”. This option might work better for consumers who consider this as an added advantage of purchasing “Echo” and want to get cheap access to Amazon’s music library.

As smart home devices drive the next wave of growth in consumer electronics, Amazon’s Echo could well be a strong player in this market. Including a cheap music service in the device should entice consumers and give Amazon another avenue to monetize its music rights.

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