This Mega Cap Just Joined Apple in the e-Music Industry
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL)’s iTunes runs off the idea that people will pay for music. However, some notable up-and-coming services may debunk this theory. In an announcement yesterday, Microsoft (NASDAQ: MSFT) stated it was throwing its hat into the proverbial ring as a competitor in the music-to-consumer industry. This news is on the back of Facebook (NASDAQ: FB) announcing that it would begin offering streaming music directly on its site. One of the trends working against Facebook is the increasing number of users accessing Facebook via their mobile devices, with the crossover happening in March, where people spent more time using Facebook via their mobile devices versus computers. Facebook is struggling with mobile advertising and integrating a music feature could further push users from monetization, which makes one question why the Apple wasn’t considered. Facebook continues to struggle with a poor revenue mix, where advertising made up 85% of total revenues in 2011.
The major issue with Microsoft’s new music program, Xbox Music, is its limited ability to appeal to the broader market. Unlike iTunes, which gives Apple access to multiple desktop platforms, the Xbox Music feature will require Windows 8, Xbox 360 or Windows 8 phone to run. However, the services will include features that blend a variety of music services, including the ability t download music, Internet radio, and subscription services; obviously more variety than Facebook is offering. The company expects less than stellar PC sales, as mobile and tablet devices steal market share from the computer industry, but Microsoft has launched its Windows 8 mobile operating system, and expects a successful launch of its Surface product.
Facebook already has a partnership with the music streaming company Spotify. Through Spotify (which Apple tried to keep out of the U.S.), Facebook users can share music and playlists using Spotify’s desktop or mobile app. The Facebook music feature, aptly dubbed Facebook Music, will allow users to stream music, interact with friends—sharing and chatting about music—directly on the Facebook website.
The Facebook Music feature will not be an official music streaming service, or a music host, but rather it will rely on other partners, including Spotify and MOG. After coming onto the music-streaming scene in 2009, Spotify now boasts more than 10 million users. Facebook’s current integration with Spotify already promotes a level of social listening, but integration directly on the Facebook site should allow a more robust social listening experience, easily trumping the failed Ping experiment of Apple.
The one caveat for Facebook’s integration into the music industry is that the streaming music industry relies heavily on advertising, much as Facebook itself has struggled with mobile advertising. The pioneer in streaming music, Pandora Media Inc (P), is down almost 35% since its IPO on ad revenue concerns. One of the killer features of Facebook Music is the ability to not only listen to streaming music directly on the Facebook site, but to join other friends in what they are listening to, elevating social experience even more. All Apple iTunes comparisons aside, an interesting note is how this will impact work productivity. The number of hours lost to Facebook is already immense, but with music integration, that number may only climb. The previously passive act of listening to music will now become an active engagement eating up more Facebook user time.
Turntable began paving the way for social listening back in 2011, and grew its user base by over 350,000 in three months. Turntable introduced the ability to listen to the same music with other people and chat about it at the same time. However, the company’s regulatory issues forced it to block international users, including 30% of its user base from Japan. The company has since seen its user count decline, due to its inability to execute on mobile development and platform refinement.
But enough about Apple and Facebook, let us not forget other big tech names in the music industry, including Amazon.com (NASDAQ: AMZN) and Google (NASDAQ: GOOG). Amazon beat everyone to the cloud music storage race with its launch of Amazon MP3 in 2008. In 2010 Google launched its music service, Google Music. Yet, neither of these sites fully caught on like that of Spotify, given the fact that each offered the ability to purchase and store music, but not the ability to stream music for free.
It is hard not to be bullish about Amazon—as many investment firms are—given the company’s growth prospects, yet there are underlying concerns over the company’s valuation. The company is one of the top tech companies and has entered the hardware market with its Kindle. Unlike Amazon, Google and Apple trade at more reasonable P/E ratios of 15 and 22 respectively. As with a number of products, Google and Apple also compete in TV industry, with much speculation about the Google TV and Apple TV. As well, Google may also have an iPad rival sometime in 2013. Worth noting is that Google co-founders Larry Page and Eric Schmidt have been selling off small amounts of shares over the past couple months in the $750-$760 range.
Apple and Google are in a heated battle in various markets, including the smartphone market, but there are reasons for investors to be both bullish and bearish; see why you should sell Google. Microsoft has a positive trend and key prospects in various hardware and software markets. Microsoft is expected to grow EPS 10% this year and 10% next year. As well, the market might be under estimating the company’s growth prospects, with a trailing P/E of 15, and a forward P/E of 9.
All of the companies mentioned have attracted some serious fund interest. Microsoft saw a couple top names invested in 2Q, Ken Fisher and Jim Simons. For Facebook, the two top investors include two tiger cubs, Tiger Global Management and Tiger Consumer Management, both making new investments of over 1.5 million shares. Apple is one of the most widely held stocks by fund managers, with D.E. Shaw and David Einhorn both being key names in the stock. Einhorn had 13% of his 2Q 13F portfolio invested in Apple, as well as Stephen Mandel and Columbus Circle Investors having 5% of theirs. Amazon called Ken Fisher as its top fund owner, and John Griffin and Steven Cohen as number one and two, respectively.
We see the Facebook Music feature spurring user growth and user retention for Facebook, but still question Facebook’s monetization ability and whether this will help drive the social network’s revenue growth. Facebook has fundamental issues that will need to be addressed irrespective of adding more features, and so we are cautious on Facebook’s outlook. Microsoft’s push into the music arena is being underrated by many, but investors shouldn’t forget that the Xbox Live community is 5 million strong and dedicated. Interestingly, there are rumors that Apple may be thinking about entering the streaming music industry, a la Spotify, but it’s too early to be sure. We’ll let you know of any updates on this situation.
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This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.