By Hannah Karp 

How many companies can survive in the high-cost music-streaming business? Plenty, it appears -- as long as music isn't their main source of revenue.

Streaming music is just a sideline for the industry's power players -- Apple Inc., Amazon.com Inc. and Alphabet Inc.

Even so, their influence looks likely to grow. Apple is revamping its Apple Music app while exploring an acquisition of streaming service Tidal. Amazon, meanwhile, is preparing to introduce a stand-alone $10-a-month subscription music service, matching the subscription fee charged by Apple Music and by Alphabet, which offers ad-free music through both its YouTube Red and Google Play Music service.

For the tech companies, paid streaming services aren't just a new revenue stream. Their strategy is to use the services as bait to attract customers and hang on to them longer, so they can sell them something else.

Apple is using its year-old Apple Music service to spur its sales of iPhones and other Apple devices.

E-commerce giant Amazon, which aims to launch its subscription service in coming months, mainly wants to encourage customers to shop. To access Amazon's existing Prime Music service, a customer needs to be a member of its $99-a-year Prime program.

Alphabet's Google Play Music service and the nine-month-old, ad-free YouTube Red service from the company's online-video unit add just a relatively tiny trickle to the company's revenue streams. But YouTube Red has driven significant traffic to YouTube's ad-supported site, its core business, according to a person familiar with the matter.

Because streaming music advances their other ambitions, Apple Music, Amazon, Alphabet's Google and YouTube units, don't need their services to be hugely profitable, though none of them are selling subscriptions at prices that suggest a willingness to lose money. That gives the tech companies a major advantage over smaller companies like Pandora Media Inc., Spotify AB and French counterpart Deezer, whose main businesses are music streaming.

"I think that any company that has some other motive [for offering streaming] is going to win," said Paul Young, a music-business professor at the USC Thornton School of Music.

That is at least partly because the music-only companies are burdened by heavy costs. The paid services typically spend 70% of their revenue on licensing music and much of the rest on acquiring customers.

That makes their margins "far too tight," according to Les Borsai, a music-technology consultant. "The only solution is to create more value with additional offerings -- aka more than just music -- and perhaps an increase in pricing, or both."

The services are also at the mercy of the tech companies that distribute their apps. Apple collects a 30% fee on in-app purchases, including music subscriptions, so it has an interest in supporting popular music apps other than its own. But it recently rejected an update to Spotify's app that didn't comply with Apple's guidelines.

In a letter to Apple, Spotify's top lawyer called the move anticompetitive. But Apple's general counsel dismissed that claim, adding that one of the features at issue with the app was intended to avoid "having to pay Apple," according to the company's general counsel.

For the recording industry, the tech titans' embrace of music streaming has been positive so far, a contrast with Apple's dominance of digital-music sales.

Record companies are happy to have Apple, Amazon and Alphabet, three of the country's biggest companies, competing to sell music subscriptions, as sales of compact discs and digital music continue their yearslong decline. And there is some evidence they have made consumers more willing to pay for services. In Canada, consumers surveyed by Nielsen Music last year said they would pay an average of $9 a month for unlimited music, up from about $6 in 2014, before the advent of Apple Music.

But independent streaming services are still crucial because they tend to drive innovation, and "ensure as an artist, and as an industry, that you continue to have a direct route to the audience [and] an option to control your own destiny," said Erik Huggers, chief executive of Vevo LLC, the music-video platform owned by Vivendi SA's Universal Music Group and Sony Corp.'s Sony Music Entertainment.

Spotify, whose owners include the major record labels, has amassed about 30 million paying subscribers for its $10-a-month service and 70 million free users in eight years, but its operating losses widened to more than $200 million last year, despite an 80% jump in revenue to about $2 billion. The company, valued at $8.5 billion a year ago, raised $1 billion in convertible debt earlier this year, giving it more room to lose money without raising more equity.

Spotify declined to comment.

Tidal, which rap star Jay Z launched last year after buying its corporate parent for $56 million, has built up 4.2 million subscribers, most of them this year, with a string of exclusive releases from some of its 20 artist shareholders. But Tidal's subscriber numbers suggest it is a long way from profitability.

Tidal declined to comment.

Deezer called off an initial public offering in October, citing "market conditions," and subscription service Rdio filed for bankruptcy late last year and sold its assets to internet-radio company Pandora, which is aiming to launch new subscription offerings later this year.

Write to Hannah Karp at hannah.karp@wsj.com

 

(END) Dow Jones Newswires

July 24, 2016 18:54 ET (22:54 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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