The smart speaker market is dominated by two players: Amazon (NASDAQ: AMZN) and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google. The two combine to take 94% of the U.S. market.
Both Amazon Echo speakers and Google Home speakers come with free ad-supported streaming built in. Google announced Google Home users will be able to stream select content from YouTube Music just hours before Amazon announced a similar service with its Music Unlimited product. Both companies will rely on their dominance of the smart speaker market to take on Spotify (NYSE: SPOT) and Apple (NASDAQ: AAPL) and grow their share of the streaming music market.
Image source: Amazon.
A little bit Apple, a little bit Spotify
Amazon and Google are combining the strategies Apple and Spotify took to grow their user bases to tens of millions of listeners.
Apple was able to grow Apple Music to 50 million subscribers and help iTunes have its best quarter ever thanks to the company's massive install base of iPhones and other Apple devices. Management said there are over 900 million active iPhone users as of the end of last year. There's no doubt that being able to pre-install Apple Music on all those devices and integrate the service into the device's operating system has encouraged more people to subscribe. Both Amazon and Google are trying to do something similar for smart speaker owners.
Spotify, meanwhile, has grown as a result of its freemium strategy. Spotify uses its ad-supported service to upsell listeners to its premium service, which removes ads and enables on-demand listening via mobile. Both Amazon and Google also plan to limit the functionality of their free streaming services, informing listeners they can unlock on-demand listening or a broader catalog if they upgrade.
Will it work?
Some 66.4 million Americans have a smart speaker in their home, with the average smart speaker owner using two devices. As mentioned, nearly all of those smart speakers are from Amazon or Google. Amazon says it's sold over 100 million Alexa-enabled devices.
But one challenge Amazon and Google will face is that consumers buy their products in order to listen to music services they already use. Streaming music is the most popular feature of smart speakers, according to a survey from Voicebot. Granted, that's just correlation; consumers may buy smart speakers and then decide to stream music. But it's kind of irrational to assume people are buying a device when they don't know what they'd use it for.
Where the strategy might succeed, however, is in convincing consumers to buy a smart speaker in the first place. If consumers learn they can buy an inexpensive device and they can start streaming music to their kitchen or bedroom instantly without having to sign up or pay for anything else, it might increase consumer adoption of smart speakers.
Importantly, Amazon and Google are offering free music streaming only in certain markets that are more easily monetized with advertisements. Amazon offers free streaming only in the U.S., while Google offers it in North America, Western Europe, and a few other valuable ad markets like Japan. Both companies are better suited to monetize listeners with targeted advertisements than Spotify thanks to their troves of user data and large active advertiser bases. On top of that, Spotify says "Ad-Supported Gross Margins are relatively strong in our top five markets," where Amazon and Google will first focus their ad-supported efforts.
In other words, both Amazon and Google should be able to turn a profit on the free streaming service. That can help subsidize the price of the smart speaker devices to get them into more homes, or just add to the companies' bottom lines. The former could benefit both companies' core businesses.
Amazon and Google are taking a relatively low-risk shot at capturing part of the growing market for music streaming while making their smart speaker devices more attractive to consumers.
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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), 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 has a disclosure policy.