Apple and Amazon Stream to a Winning Tune
The biggest tech platforms are using their vast ecosystems to bludgeon the competition … and they are only getting started.
On Monday, managers at Apple, Inc. (Nasdaq: AAPL) announced that Apple Music, its Spotify Technology S.A. (NYSE: SPOT) competitor, would begin offering higher-quality music streaming for free. Hours later, Amazon.com, Inc. (Nasdaq: AMZN) followed.
It’s difficult to compete with free.
Let’s be clear: Apple and Amazon.com are able to offer goodies to their customers at no additional cost because their managers have done the math. They know that locking in patrons is even more important than quick profits on services. Plus, the markup on branded hardware can more than make up the difference, especially when customers are stuck in the ecosystem.
This isn’t new. Most cable TV and wireless providers do the same thing … sort of. They give you added features as a promotion, only to take them away and raise the price six months later. The difference is consumers are wise to cable and cell phone company shenanigans. Studies show subscribers hold these services in extremely low regard.
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The juxtaposition with the big-tech platforms is stark. Consumers love their iPhones and Amazon Prime accounts. They like the companies, too.
A survey from Morning Consult in 2020 found that Amazon.com was the second most trusted corporation in America, right behind the United States Post Office.
Trust is leverage. Now the big-tech platforms are tilting all the scales in their favor to lock in as many customers as possible before government regulators and politicians catch on.
Because of this, tech giants are in a great position to capitalize for at least the next decade.
Global commerce is in the very early stages of a digital transformation that will see all of the analog world replaced with digital infrastructure.
As this process transpires, the big tech ecosystems will be more important than ever. Corporate and consumer customers will seek convenience over the hassle of switching for lower prices.
That brings me back to Apple, Amazon.com and lossless, or so-called HD streaming audio.
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Spotify is the global leader in streaming audio with 155 million paid subscribers, up from 124 million a year ago. Shares trade at around $229.93 as of writing, down from $387 in February.
The business is going to be negatively impacted by Apple and Amazon.com giving away HD streaming audio. Yet, given the size of its ecosystem, Spotify managers have many levers they can pull to chip away at negative investor sentiment.
Managers are aggressively building out infrastructure for targeted and in-service advertising. And the sector is expected to reach $200 billion in sales by 2030.
The business has the potential to become the digital equivalent of radio for the entire world.
So, even though this will most likely just be a bump in the road for Spotify, Amazon and Apple will be the true winners of this development.
And it’s great news for current shareholders.
Savvy investors should strongly consider using recent weakness as a buying opportunity.
Jon D. Markman