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Microsoft Corporation’s Groove Music Is Ending … Who’s Next?

Brad Moon

At the start of the week, Microsoft Corporation (NASDAQ:MSFT) announced that it was exiting the streaming music business. The company’s Groove Music Pass is being shut down, and subscribers are being offered the option of transferring their music collections and playlists to Spotify.

Microsoft Corporation's Groove Music Is Ending ... Who's Next?

Source: Microsoft

Does Microsoft’s decision to get out of the streaming music business mean trouble ahead for the industry? With Spotify getting ready for an iPO and AAPL stock increasingly reliant on Services revenue from Apple Inc.’s (NASDAQ:AAPL) Apple Music, it’s a question worth asking.

Microsoft Shuts Down Groove Music Pass

On Monday, Microsoft announced it was shutting down its Groove Music Pass streaming music service.

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“As we continue to listen to what our customers want in their music experience we know that access to the best streaming service, the largest catalog of music, and a variety of subscriptions is top of the list. Which is why we’re excited to announce that we’re expanding our partnership with Spotify to bring the world’s largest music streaming service to our Groove Music Pass customers.”

That description of what’s happening has been very carefully polished by Microsoft’s PR team. The reality is that as of Dec. 31, Microsoft’s Groove Music app will cease to offer the ability to stream, download or purchase music. The app will continue to support locally owned music, but streaming is done. And the “partnership” with Spotify amounts to a simplified process for moving Groove Music playlists and collections to Spotify. There, Groove Music customers will be paying the full rate for a Spotify subscription, unless they quality for Spotify’s free 60 day trial.

Customers who have pre-paid for Groove Music Pass streaming beyond the Dec. 31 shut-down date will get a pro-rated refund from Microsoft.

Is Microsoft’s exit a sign that the streaming music industry is in trouble?

Streaming Music Is Healthy and Growing, But Consolidating

While it may be a small comfort to fans of Groove Music Pass, Microsoft’s decision to shutter its streaming music service is not a canary in the coal mine. In fact, the streaming music industry is going gangbusters.

Despite the demise of Groove, streaming music is credited with kickstarting a revival in the music industry. This means a second year of consecutive growth — after an extended decline where record labels saw their revenue plummet 40% over 15 years. Affordable, easily accessible streaming music is being credited with virtually eliminating music piracy, while streaming revenue for the record labels increased 60% last year.

While not all the streaming music services are profitable — Spotify lost over $600 million last year — they are adding new users at an impressive pace and signing new deals with record labels that offer more favorable terms.

The demise of Groove Music Pass is more a sign of the consolidation of the industry. As the business grows, it’s being increasingly dominated by a smaller pool of big players. Groove Music Pass joins the many streaming music services — some of them pioneers — that couldn’t scale up quickly enough to compete with the like of Spotify. Services like Grooveshark and Rdio. Others, including Beats Music and Songza were snapped up by bigger players.

At this point, over 60% of all streaming music subscribers are held by just three services: Spotify (with 40%), Apple Music (with 19%) and Amazon.com Inc.’s (NASDAQ:AMZN) Amazon Prime Music and Amazon Music Unlimited (12%).

The big three continue to add subscribers at an impressive clip. In their latest numbers, Spotify hit 60 million paid subscribers this summer, Apple Music is at 30 million (adding 3 million since June) and Amazon has 16 million subscribers to its Amazon Music Unlimited and Amazon Prime Music services.

Despite the impressive subscriber numbers, there is still plenty of room for growth. The going rate for streaming music services is $9.99 monthly (although discounts can knock that down), so at this scale, the revenue can add up quickly. Apple Music is already a big part of that company’s Services division. And Services revenue is increasingly important to AAPL stock, especially as iPhone sales soften.

The streaming music industry is experiencing rapid growth and economics that seem favorable to everyone. Record labels are making money, customers are signing up (often for multiple services) and the services themselves — with the notable exception of Spotify — seem to be profitable. Microsoft’s Groove Music Pass just wasn’t able to cut it in a streaming music market where bigger is better and a few of the biggest players are slowly but surely squeezing out the competition.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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