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After months of rumors, Amazon finally announced the details of its new music streaming service, which joins an already crowded market. While the price for the standalone music service is $10 per month, in line with all the other services, there are two other offers that set it apart. For Prime subscribers, the price is an additional $8 per month, on top of existing yearly fees, and for users who own an Amazon Echo, the price drops even further, to $4 per month. That's right: Music is back as a loss leader.
The precedent for this goes all the way back to the physical era, when record stores offered deep discounts on new or popular albums in order to draw customers into shops, and then upsell them on buying other albums. The stores figured they would make up the difference with increased profits from increased traffic, and for many years, this worked like a charm. It was only when the CD era started to die off that things took a turn for the worse, and big-box stores started getting into price wars that smaller players couldn't afford.
Back then, the new album as a loss leader was a catalyst for sales of other music or unrelated goods — if you came to Target to buy a CD, for example, you might pick up some laundry detergent while you were there, as well. But with the launch of the iPod, music became a loss leader for a device that was specifically tied to that music. Sure, there were other MP3 players in the market, and it was possible to listen to music from other sources on an iPod, but many mainstream consumers chose the path of least resistance and stocked up at the iTunes store. Ninety-nine cent downloads were never the endgame for Apple — the device that cost several hundred dollars was always what they wanted to sell, and music was just a means to an end.
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The big question for Amazon is whether the promise of deeply discounted streaming can move the needle enough to get Echo consumers to subscribe for one device only. In terms of devices, the iPod had very few mainstream competitors, but the Echo competes with Google Home, upcoming Siri speaker, Sonos and other speakers as well as people simply choosing to look things up rather than saying them aloud. And the iPod was primarily a music device, whereas the Echo can be used for multiple purposes, so the tie to music feels less direct here. My two cents is that Echo devices will work best for the consumer looking for the "lean-back" listening experience, like the experience radio delivers. Asking Alexa to play a certain station requires a lot less work for the user than deciding what song, on what album, by what artist they're interested in hearing.
That being said, there may be an audience of Echo users who could be convinced that a few bucks a month is a great deal for the ability to say, "Alexa, play this song." But it's harder to see people being swayed by a cheaper streaming service when it comes to the Echo acquiring new users if they weren't already interested — especially for one device only. (Also, these devices, in my opinion, are best suited for a lean-back listening scenario in general — like radio.)
The question of whether this will lead to a price war among streaming services is an interesting one to consider, but Amazon might be the only company that can pull this off. Unless Spotify or Apple Music deeply integrate with a piece of hardware, it doesn't make sense for them to spend so much up front, especially when paths of profitability for streaming services are rocky at best. What Amazon is doing here isn't new, and it will be interesting to see if the trend of music as a loss leader is one that was worth bringing back.
—By Scott Keeney, Re/code.net.
CNBC's parent NBCUniversal is an investor in Recode's parent Vox, and the companies have a content-sharing arrangement.