Google Inc (GOOG): A Pandora Media Inc (P) Threat?

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Google Inc (NASDAQ:GOOG)Google Inc (NASDAQ:GOOG) unveiled its subscription-based music service on Wednesday. Google Music All Access allows subscribers to stream millions of songs on demand for a flat monthly fee.

Many reviewers have panned the service, as it fails to push the envelope. There are already a plethora of similar services (Spotify, Rhapsody, Rdio, etc.) and Google Inc (NASDAQ:GOOG)’s app doesn’t offer anything new.

While these criticisms are valid, they ignore the larger picture: Google Music All Access is not intended to be a cornerstone of the company’s business, but rather, a way to support Google’s larger strategy.

A wave of streaming music services

Streaming music services have been around for at least a decade, but it wasn’t until recently that they took off in popularity.

Rhapsody was building the first service around the same time Steve Jobs was working on putting together the iTunes music store. At the time, Jobs doubted that they would ever become popular — people wanted to own their music, he reasoned.

Ironically, it was probably Jobs that made streaming music businesses viable. Prior to the advent of mobile devices, subscribers were limited in where they could get access to their music. Now, with smartphones and tablets, subscribers can get access nearly anywhere.

This has led to a wave of competing services — but slight nuances aside, most of the services are, at their core, indistinguishable. Pay $10 per month, get unlimited access to millions of songs. Google Inc (NASDAQ:GOOG) Music All Access is no different.

Not a lot of money to be made in streaming music

Is there money to be made in the streaming music business? Perhaps one day. At present, neither Spotify nor Pandora Media Inc (NYSE:P) are profitable businesses. Obviously that could change, but even if it does, the industry clearly has low barriers to entry.

Conversely, Google Inc (NASDAQ:GOOG) reported GAAP operating income of $3.5 billion last quarter, mostly on search, an industry it completely dominates. In short, even if Google created the best streaming music service ever, it would not have much effect on the company’s bottom line.

The same is true even for Apple Inc. (NASDAQ:AAPL). Despite the fact that Apple dominates digital music sales, the money it makes from iTunes is a relatively paltry figure. For years, it was assumed to be break-even.

And even if Apple Inc. (NASDAQ:AAPL) does make some money off music sales, it’s only $100 million or so — a tiny sum compared to the more than $50 billion Apple generated over the last year.

So why did Google waste its time building a service that will likely never make much money? There are two reasons.

Weakening Apple’s ecosystem

First, streaming music services are a threat to Apple’s mobile device dominance.

Much of Apple Inc. (NASDAQ:AAPL)’s famed ecosystem is built on iTunes. A user who has spent hundreds of dollars amassing a large iTunes library is more likely to stick with Apple devices than one who hasn’t.

Google Play (without All Access) was initially designed as an answer to this problem. With Google Inc (NASDAQ:GOOG) Play, Android users can upload the mp3s they’ve purchased to the cloud, and stream them to an Android device.

But, just in general, users with streaming music subscriptions are probably unlikely to buy music, period. As more consumers embrace this model, iTunes loses potential customers, and Apple’s devices lose some of their stickiness.

Given that Google Music is (right now) only available on Android devices, it won’t directly draw any iPhone owners away from iTunes. But, just by throwing its hat into the ring, Google is helping to move the industry forward.

Gather data on music habits

Big data will be a key driver of Google Inc (NASDAQ:GOOG)’s business in coming years. As search evolves, users will come to expect information to be given to them before they even ask for it. Google’s personal assistant app, Google Now, is an early example of the promise this technology holds.

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