Brief:

• Amazon is in talks with record labels to launch a free, ad-supported music service as early as this week to rival music streaming pioneer Spotify, Billboard reported, citing unnamed sources. The e-commerce giant would market the music through its voice-powered Echo speakers and would have a limited catalog of songs.
• Amazon has offered to pay some record labels a per-stream licensing fee that would remain fixed regardless of how much advertising the company sells. Currently, Amazon offers ad-free music in two tiers of service: Prime Music and Amazon Music Unlimited.
• Prime Music has a limited song selection and comes packaged with every Amazon Prime subscription, which charges $119 a year for two-day delivery on most products and Amazon Prime Video for video streaming. Amazon Music Unlimited charges $9.99 a month for standalone service, but Prime members pay only $7.99 monthly and Echo-only listeners pay just $3.99 a month.

Insight:

Before the possibility of selling audio ads on the potential music service, Amazon's U.S. ad business was forecast to jump 53% this year to $11.3 billion as the e-commerce giant expanded its selection of ad products, including product display spots, sponsored products and sponsored brands.

Amazon has a key advantage in selling audio ads, including a 70% share of the U.S. smart-speaker market and extensive customer data that can be harnessed to target listeners and direct them to its massive inventory of products. Amazon is the No. 3 digital ad seller in the U.S. after Facebook and Google, and is forecast to grow its market share to 11.2% by 2021, per researcher eMarketer.

The addition of audio ads to its streaming music service would create an additional revenue channel for the company to more directly compete with radio broadcasters and bigger music streaming rivals like Pandora and Spotify. While Amazon doesn't disclose its paid subscriber numbers, eMarketer estimates that Amazon Music will be the fastest-growing music streaming service by the end of this year. The researcher predicted that Amazon Music's paid listener base will rise 17.7% to 35.8 million this year, and by 10% to 39.4 million in 2020. The addition of a free, ad-supported service will only boost that growth rate and help marketers reach a wider audience of listeners.

Spotify, which already faces growing competition from Apple, is most vulnerable to Amazon's potential move into ad-supported music streaming. Spotify has a free, ad-supported service to give customers a taste of its service before encouraging them to get the paid subscription for $9.99 a month for unlimited song streaming. The company has 96 million paying subscribers and 116 million free users, while Apple Music has 56 million paying subscribers worldwide and no free, ad-supported tier. The iPhone maker this year overtook Spotify in U.S. paid subscribers and isn't likely to start selling ads, given its focus on consumer privacy and user experience. Sirius XM, which completed its acquisition of Pandora in February, has 100 million listeners in North America and about 40 million paid subscribers.