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Apple must up its content game as Amazon attacks again

Samsung’s Galaxy Note 7 disaster has distracted attention recently from Apple’s challenges, but in fact any corporate schadenfreude it may be feeling over its handset rival’s setbacks is misdirected. The real danger to Apple’s ability to dominate the ‘everything connected’ experience in the same way it has defined the smartphone comes from the web players, and most urgently, at the moment, from Amazon.

Hot on the heels of the surprise success of the Amazon Echo, which has forced both Apple and Google to respond with AI-enabled smart home controllers, the giant retailer has launched a music streaming service clearly designed to outdo Apple’s own service, which has been one of the most significant growth areas in its recent underwhelming quarters.

This battle indicates how important it is for all the connected device players to attract strong content and services They need to turn home hubs, in-car infotainment systems and all manner of portable and wearable devices into essential ways to consume media, not just gimmicks to be left at the back of the drawer after the first few weeks.

The real revenue and brand attachment for the device vendors increasingly comes from the content and cloud services, as well as monetizing the data those generate. Amazon knew that when it launched its Kindle Fire tablets, undercutting all its rivals on hardware cost in order to encourage new usage of its stores and content services.

It failed to translate that disruptive idea to the smartphone market when its handset bombed, indicating how entrenched Apple and the Android majors are in that space. But as the handset commoditizes, and new web/cloud usage shifts to other connected devices, Amazon has its chance again, and has seized it decisively with the Echo – positioned to expand its role enormously from useful voice-controlled media hub to the primary way for users to query the web and organize their homes and their lives.

And now it is strengthening the Echo, and its overall platform, with the new music offering. Subscriptions are as low as $3.99 a month for Echo owners, a big shift away from the norm of $9.99 which has persisted for some years. Amazon Music Unlimited lets users access a huge catalog of songs on-demand, in the same way as Spotify and Apple Music. Subscriptions to play music on the Echo cost $3.99 per month; for access beyond that device, subscriptions cost $7.99 a month for members of Amazon’s Prime shipping and video service and $9.99 for non-members. Amazon will continue to offer Prime members a limited streaming service for free.

Steve Boom, VP of Amazon Music, told Reuters: “The first phase of growth (in music streaming) was driven almost entirely by smartphones. We believe pretty strongly that the next phase of growth in streaming is going to come from the home.”

As with mobile devices, Amazon is able to take a different stance from rivals when it comes to margins. Music streaming services deliver very little profit in their own right because most of the revenues go to rights holders, but Amazon is accustomed to the ultra-low margins of the retail sector, and it can use Music, like Kindle Fires, to create increased loyalty to its vital Prime subscription service, which, in turn, drives consumption of all its content and stores, and helps tie users into an all-Amazon experience which reaches every area of their digital usage – as Apple has successfully done across handsets and PCs, but has been less sure-footed in TVs, home hubs and (so far) cars.

Echo’s AI engine adds value to the music service by providing recommendations and also enabling users to request songs that suit a particular mood, or search with lyrics.

In this content-driven market, Apple cannot rely entirely on its brand loyalty and famous user interface. It needs to stay one step ahead in the apps and media it offers its customers. The music streaming service was a good start, as consumers shift from iTunes downloads to online listening. But it may well be outmanoeuvered by Amazon.

All this throws new significance on CEO Tim Cook’s current visit to China and Japan. In the former, he announced a second R&D center, in Shenzhen, showing that the once-overly US-centric Apple is aware not just of the sales potential of China, but the need to develop and deliver localized services and experiences (something Nokia was always good at, but an art which has been largely ignored by the new wave of smartphone makers, opening the door for local players like Baidu to hijack the user relationship).

In Japan, Cook visited Nintendo’s headquarters in Kyoto, sparking speculation that the two companies may intensify their relationship. Gaming, especially when it uses bandwidth-heavy techniques like virtual reality and massive multiplayer, can be a significant driver for users to adopt new devices. Recently, Super Mario Run for iOS marked the first time Nintendo has made some of its key gaming properties available on mobile gadgets.

Nintendo shares have risen steeply this year, partly because of the firm’s conversion for supporting third party smartphones, rather than keeping its games exclusive to its own consoles and portable games players. Apple stole a march on Samsung with this deal, since the iOS version of Super Mario will be released in December, in time for the holiday season, while there is no date scheduled for an Android release.

A close, or even exclusive, relationship with a content brand giant like Nintendo is just what Apple needs to keep its devices attractive and increase usage. The Japanese firm had always refused to license its intellectual property in order to avoid cannibalizing its hardware. But early last year it changed its mind and announced a partnership with Japanese mobile game make DeNA to release five mobile titles by March 2017. This alliance is particularly geared to getting children young, since they are more likely to play their first games on a parent’s handset than on a console.

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