Amazon launched a streaming music service Thursday for its Prime subscription customers. Prime customers pay $99 a year in exchange for free two-day shipping on many items in the Amazon store, as well as the ability to stream movies, borrow e-books and, now, listen to a library of songs from major artists.
Prime Music includes over a million songs and does not have ads. But Amazon's service lacks many of the draws of Pandora and iTunes radio, making it unlikely to steal these services' existing customers.
Amazon Prime Music doesn't fare to well in a head to head comparison with Pandora. Like Amazon, Pandora has a library of more than a million songs, according to Pandora founder Tim Westergen's comments at a September Goldman Sachs conference.
However, Pandora also has a "today's hits" station that plays new releases. Most of the songs on Amazon Prime Music will be six months old, according to a Wall Street Journal report, and Amazon's library does not include songs from Universal Music Group, the largest record label.
Pandora also enables music discovery. The company's proprietary algorithm analyzes songs and picks similar tracks, enabling a listener to hear more music that they might enjoy rather than keep listening to the same old songs that listeners might even own already.
Moreover, Pandora is cheaper. An ad-free Pandora subscription is just $4.99 a month, or $60 a year. Prime membership costs $99 a year, although it comes with far more than a music streaming service.
Pandora's stock rose 0.8% by noon, after the news. Amazon shares fell 1.75% as investors bet that the service would not steal Pandora's user base.
Apple's iTunes radio also beats Amazon in a comparison of features. With Apple's $3 billion purchase of Beats, Apple got a robust "human-curated" recommendation engine that helps subscribers discover new music. Apple also has access to the largest music library and all the new tracks, thanks to its iTunes store.
Why Apple and Pandora Should Still Worry, Even Though They Have Better Services
Having a better product won't necessarily protect Apple and Pandora from seeing an impact from Amazon. Amazon could put a significant damper on the growth of each company's streaming service.
While Amazon's service isn't better, it is serviceable, ad-free and available at no extra charge to existing Prime subscribers. And Amazon has at least 20 million Prime subscribers, according to a note by Macquarie analyst Ben Schachter. That's 20 million people that might not bother to pay to subscribe to a new music service -- even if the competition is better -- since they already have free streaming music included with their free shipping, Kindle library, on-demand television and movie streaming service.
Pandora needs growth to justify its near 55 times earnings multiple. And that growth could be harder to come by, with Amazon growing its Prime subscribers and then offering them a free music service as a bonus that might make them sufficiently content to avoid signing up for another streaming radio product.
Working in Pandora's favor is the fact that it already has a massive user base. As of May, it had 77 million active members who listened for a total of 1.73 billion hours during the month. More than 250 million people have registered for the service and could conceivably log back on at any time.
iTunes radio has a much smaller base and, therefore, could see more of an impact from Amazon. Apple says it has about 40 million users. However, it's not clear that those 40 million people spend a lot of time listening like they do on Pandora. Beats has just 250,000 users.
When Apple justified its $3 billion Beats purchase, it made it clear that streaming music was central to Apple's future. Those 20 million unmotivated music subscribers -- and growing -- could make that future far less rosy.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.