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Amazon's Next Move in Advertising: Streaming Music

Danny Vena, The Motley Fool

Advertising has been an area of intense interest for Amazon.com (NASDAQ: AMZN) over the past couple of years. What began as a way to promote products on its digital shopping site has become a fast-growing and extremely lucrative sideline, generating more than $10 billion for the company last year.

That success has prompted Amazon to find other ways to grow its nascent advertising business. Reports recently emerged that the company is in talks to launch an ad-supported streaming music service, a move that should have industry leader Spotify (NYSE: SPOT) quaking in its digital boots.

Woman reclining on couch wearing headphones listening to streaming music on her phone

Image source: Getty Images.

Alexa, stream free music

Amazon is looking to launch a free, ad-supported music service in a move that would represent the clearest threat yet to Spotify's dominance, according to a report from Billboard. The service would be geared toward Amazon's voice-activated Echo smart speakers and would feature a limited catalog of songs.

In order to secure the rights to this music, Amazon has reportedly agreed to pay some record labels a per-stream rate, at least initially, regardless of how much advertising is included on the platform.

This would be the third music offering from Amazon. Prime Music, which offers about two million songs, is a value-added benefit for its Prime member loyalty program, which offers subscribers a host of perks such as streaming video and free shipping for $119 per year. The company also offers Amazon Music Unlimited for $9.99 per month, which provides access to a library of 50 million songs. The cost is discounted for Prime members to $7.99 per month, a 20% savings. Listeners using a single Echo or Fire TV device get an even better deal at just $3.99 per month.

Amazon already has the third-largest subscription music base, behind Spotify and Apple Music, and the company is obviously looking to improve its position.

Spotify's bread and butter

Spotify has a structure that, until now, has been unique among subscription music services. The company uses its free, ad-supported tier as a funnel to attract future paying customers -- and it was the only subscription service that offered that option. Spotify closed out 2018 with 116 million monthly active users (MAUs) in its ad-supported tier, users the company hopes will eventually upgrade to the paid service. The company also had an industry-leading 96 million paid subscribers to end the year.

If the report is true and Amazon indeed debuts a free service, it could potentially siphon off some of Spotify's future paying customers.

An overarching strategy

While it would be easy to think this move is all about the music, Amazon has much more to gain by enticing more customers into its ecosystem and boosting its advertising revenue.

Amazon employed a similar strategy recently with the introduction of a free, ad-supported video streaming service -- Freedive -- offered by its wholly-owned subsidiary IMDb. The move was seen as a direct threat to Hulu and Roku who lead the ad-supported streaming video space. While that's true, it was mostly about Amazon boosting the contributions to its fast-growing ad sales.

Advertising revenue more than doubled for Amazon in 2018, growing 117% year over year to top $10 billion. The company's forays into free, ad-supported services like music and video will no doubt juice those already impressive returns.

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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. Danny Vena owns shares of Amazon, Apple, and Roku. The Motley Fool owns shares of and recommends Amazon and Apple. 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 recommends Roku. The Motley Fool has a disclosure policy .