Microsoft launches music streaming service

Rumours that Apple has been readying a music streaming service to rival the likes of Spotify have been being ground out of the rumour mill for months now, but yesterday Microsoft announced the launch of its Xbox Music streaming service, due to be tied in with Windows 8 and Windows Phone 8.  The service will replace the company’s existing Zune Music Pass, removing some features (such as the ability to download and own 10 songs for free per month) while adding others (like Smart DJ) and attaching itself to Microsoft’s Xbox brand, rather than leave it under the largely unloved Zune umbrella.

There will be two tiers at launch: an ad-supported, free version and a premium service offering an ad-free experience and offline caching of tracks. UK pricing has been announced at £8.99 per month for the full service, undercutting the £9.99 per month charged by Spotify. Spotify, the biggest player in this space in the UK and Europe, also has an intermediate tier for £4.99 a month that allows for unlimited, ad-free streaming without mobile streaming or online caching. The number of hours you can stream for free on Xbox Music will be limited after 6 months’ use, and it’s not yet known whether Microsoft will allow mobile streaming for ad-supported users.

Xbox Music will come with Windows 8 (both x86 and RT platforms) and Windows Phone 8 devices, and will also be included in the upcoming Smartglass update for Xbox 360. Assuming decent Windows 8 sales among the less sophisticated users not already using existing music streaming services, this move has the potential to grow the music streaming market by a huge amount. Whether that growth will mean that anyone starts making decent money out of music streaming is a different matter, however: Spotify still makes significant losses, and it’s often claimed that artists don’t make much money through streaming either. Pandora blew a bit of a hole in that second notion, though, revealing how much it pays artists. 6 made $1m+ from Pandora alone last year, while 2,000 artists in total grossed $10k+ from Pandora in the same period. That long tail is made possible in a service like Pandora because it also serves as a music discovery service, playing songs and artists similar to what you said you wanted to listen to, and Xbox Music’s “Smart DJ” feature does a similar thing, albeit only at the level of the artist rather than individual song. We’ll see how that works out.

As far as mass adoption is concerned, there are three issues to overcome:

1. Amassing a large enough library that people will decide to use Xbox Music over rival services

   Bearing in mind Microsoft’s size, and more importantly its distribution, this could go one of two ways: either the labels, with whom Microsoft already has something of a relationship thanks to years of working together on a variety of Zune-branded music offerings and the transactional costs are lowered, or they’re reluctant to get behind something disruptive of their established business model when a company the size of Microsoft is behind it. I don’t think that MS would go public with the announcement (which they managed to keep impressively leak-free) without the backing of the major labels though, so they almost certainly have perfectly good coverage for a service launch. 

2. Whether that library, the service’s platform compatibility and the £1 per month undercutting of its main European competitor will be enough to negate switching costs for existing Spotify users.
   
   People like Spotify. People don’t like change. People like convenience. The prospect of a (slightly) thicker wallet can probably get Xbox Music past the first, but a lack of the third could very well get in the way. At launch and in the short term, Xbox Music will be available only on Windows (Phone) 8 devices. No web client, nothing on Windows 7 or even Windows Phone 7. No client for Android or iPhone until some time in 2013. Spotify is going to run into trouble because they are making pretty huge losses while charging more than Microsoft plans to, particularly when the nature of streaming means that there is no ownership or incompatibility to act as a barrier to switching. On the other hand, they may be saved by the fact that their product will be more widely usable in a period where there is going to be a much greater focus on streaming services. 

   Microsoft is going to spend a fortune (over $1bn) on marketing Windows 8, and you can bet that Xbox Music is going to be one pillar of that campaign. When people see that, they may think “Hey, that’s a cool idea. I’d like to get in on that.” Xbox Music isn’t going to sell you a new computer of smartphone when you don’t need one though, especially when the possible saving over platform-agnostic services that will run on what you already have is only £12 a year.
   
   

3. Possible (even probable) antitrust suits arising in relation to the bundling of the software with Windows. 

   Microsoft has received huge fines in the past from competition regulators in Europe over the bundling of software with Windows. An antitrust complaint related to Windows Media player attracted a fine of €497m, followed by a further €280.5m, while 2009 proceedings against Microsoft meant that users of Windows in Europe were presented with a choice of twelve browsers upon installing the OS for the first time. That something similar is likely to happen here does not require too much of a leap. 

   Now, a second competition-related concern, this time on pricing: Microsoft is committed for the long haul in markets it sees as most important. Windows Phone has had a lot of trouble gaining traction, but MS is backing the platform to the hilt. The company has made it to the point where Windows Phone’s value proposition will be most apparent: that is, as the mobile companion to the most widespread desktop operating system on the planet. Adoption of Windows Phone 8 in the next 12-18 months will be the true test of consumer enthusiasm and how comprehensive a content and devices offering Microsoft can put together. Xbox Music is another step in that strategy, and I would be willing to wager that the boys and girls in Redmond will commit resources to this effort until something forces them to stop. When Spotify is losing money hand over fist while charging £9.99 a month, Microsoft could be accused of predatory pricing by supporting a loss-making music streaming service with other revenue streams in order to undercut competitors with a narrower business. Of course, Spotify makes money on its paying users – it’s the free ones who are sucking it dry, and converting these to paying customers is the challenge. I doubt that MS would lose money on its users paying £8.99,  which makes levelling a charge of predatory pricing difficult. Nonetheless, I would be very surprised not to see some interest from EU regulators in relation to Xbox music.What do you think of Xbox Music? Do you already use Spotify, Rdio or some other streaming service? Which gets your pick?