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Wrecking ball: could big tech firms ruin the Spotify party?

As offerings becomes more and more alike, price competition for music access services will fall, benefiting those with diversified business like Apple, and hurting stand-alone sites like Pandora. Miley Cyrus

YouTube is contemplating the launch of a new music service. But how would such a service fare against established music services like Spotify, Rdio, and Pandora?

All these services are referred to as “access-based music services”. They offer music listeners access to millions of songs they can listen to as much as they want for free (with advertising and only basic functionality) or for a monthly subscription fee (without advertising).

Attracted by the growth of this new music distribution model, there is a steady stream new access-based music services being added to the market. This growing herd is spearheaded by a small group of early entrants, primarily Spotify and Pandora.

Four of the world’s most influential digital enterprises – Amazon, Apple, Google and Microsoft – have also been attracted by this new music distribution model and have all launched access-based music services during the last 24 months.

Recently it has been rumoured that YouTube (owned by Google) is about to launch an access-based music service that is primarily focused on music videos.

If the rumour is true it will not be Google’s first attempt to enter the music service market. Google already has a music service as a part of its Google Play offering and it is also a member of a joint venture that operates the music video service Vevo.

The competition in this space is already fierce and it’s likely that during the next couple of years there will be a period of rapid consolidation as the strongest services survive and the weaker services get acquired or go bust.

At the moment none of these services are profitable and they require investors with deep pockets to support their growth.

The leading services argue that their business models are viable and the only reason they are not profitable at this stage is that they are currently in a rapid period of growth. But it’s still too early to conclude that their predictions are correct and if the services ever will be viable as stand-alone services – such as Pandora and Spotify.

As time goes by the services will most likely become increasingly similar and offer the same kind of music on the same range of devices. Such a development will put a downward pressure on the subscription fees and on the profitability of the services.

If the market for access-based music services turns into a business with low profitability it is very likely that they have to be part of a larger offering. In that case the four players – such as Amazon, Apple, Google and Microsoft – are in a strong position.

They do not necessarily have to make a profit from their music services since those are just miniscule pieces in their vast and diverse service offerings. These players are able to generate profits from other sources such as advertising or by selling the devices required to access the music services.

Given this, it’s likely the four players will eventually push the smaller pioneers out from the market in the same way as we have seen Amazon do in the e-book marketplace.

But there is also a possibility the early movers, such as Spotify and Pandora have been able to get a head start that will turn out to be impossible to close.

Some of these music services are quickly trying to establish themselves as the “operating system” for online music. They encourage other software developers and media companies to integrate with their music service and to use their “music delivery platform” as the exclusive provider of music.

Spotify has already established close relationships with companies such as Facebook, The Guardian, Rolling Stone Magazine and Billboard. The integration with these and other popular online services makes it much more difficult to compete simply by offering music at a lower price (or for free) – as YouTube very well might do.

And record labels – who for decades have been in the control of the rights holders – have made investments in Spotify, the leading access-based music service at the moment.

These rights holders – especially bigger companies like Sony – certainly want their music to be distributed to as many potential music buyers as possible, but they also want to retain control of that music in order to keep up the retail price of their intellectual properties. They would be keen to make sure that the service stays alive even through potentially difficult times.

The market for access-based music services is still immature and it’s difficult even in the short term to predict how it will evolve. A number of hard questions need to be addressed in order to make these services a truly viable option to the traditional music distribution models.

But it would be surprising if access-based music services were not the most common way to distribute, discover and listen to music in only a few years time.

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