Weekly Update

Amazon’s sub-Prime music streaming service

Amazon launched its music streaming service, Prime Music, this week like it was trying to keep it a secret. The site went live in the wee hours Thursday without an official announcement and with very low-key promotion. Compared to the splash Apple made last month by acquiring Beats Music in a $3 billion deal Amazon’s rollout of Prime Music feels like a throwaway.

The service itself seems like a bit of a throwaway, too. Apart from a 30-day free introductory period it will be available only as part of a $99 a year Prime membership and boasts a mere 1.5 million songs in its catalog, compared with the 20 million or so available on other paid services like Beats and Spotify. Prime Music also doesn’t have any tracks from Universal Music Group, the largest label/distributor, because Universal didn’t like the licensing terms Amazon was offering. Nor will it have new releases from major artists on other labels because Amazon was unwilling to a the premium the labels wanted for the latest tracks.

Sources told AP the labels will divide an annual royalty pool of $40 to $50 million, rather than receiving a fixed per-stream royalty. Evidently, whatever amount Amazon was willing to add to the pool to lure Universal the label thought it wasn’t enough.

Without knowing more of the details it’s hard to say which side is playing hardball (perhaps both are). But pricing disputes between Amazon and rights holders do seem to be erupting with some frequency these days. The retailer’s standoff with Hachette over ebook pricing is well into its second month with no resolution in site, and this month reports surfaced that Amazon is refusing to take pre-orders on select Warner Bros. DVDs and Blu-rays, including last year’s blockbuster The Lego Movie.

Sources told the Digital Bits the pre-order blackouts are related to a disagreement between Amazon and Warner over the terms of a new contract. Since the ban does not appear to effect all Warner DVDs it’s fair to assume the dispute does not involvement their DVD deal per se but is more likely related to digital licensing terms for Warner titles on Amazon’s VOD platform and Prime Instant Video.

As I noted in an earlier post, pricing disputes between vendors and retailers are hardly new and happen in a wide range of industries. But there does appear to be a pattern emerging between Amazon and rights owners that does not bode well for rights owners.

None of the current disputes appear to concern the price of physical goods. Amazon is still selling Hachette hardcovers, albeit with delayed delivery, Warner DVDs and Universal CDs, under whatever wholesale terms obtain between them. Rather, the disputes concern licensing terms for digital distribution of content; physical goods from the vendors are simply being used as leverage by the retailer in digital licensing negotiations.

And there, Amazon seems very determined to keep a tight lid on its content costs. Prime Music is offered free to Prime members, after all, as is Prime Instant Video. Neither appears to have its own P&L.

From Amazon’s point of view they’re merely cost centers; the licensing fees it pays rights owners are effectively part of the subscriber acquisition costs for Prime’s two-day shipping plan — a number Amazon needs to keep as low as possible.

The payoff for Amazon comes from the increased spending by Prime members across all categories of product. According to one estimate, Prime members spend 130 percent more per year with Amazon than non-Prime customers.

To be sure, Amazon has designed Prime Music to offer the labels some of that upside. The service is heavy on curated playlists and prominently promotes featured artists — moves clearly designed to drive sales of downloads from Amazon’s MP3 store and even CDs.

Even if Prime Music generates incremental download sales for the labels, however, it’s not going to reverse or seriously retard the broader, secular shift in the music business from selling copies to licensing access. In the long run, music rights owners need to figure out how best to maximize revenue from licensing access. Turning that business into a loss leader for someone else’s strategy is probably not the best route to that goal.