Why Xbox Music Is A Nice Addition To The Surface Product Suite

| About: Microsoft Corporation (MSFT)

Early Monday, Microsoft (NASDAQ:MSFT) announced that it will add Xbox Music as a preloaded device to its Surface tablets. Much like Spotify, the service will allow users to compile their own on-demand music and playlists, but it will also be able to be used for downloading individual songs onto a cloud storage system.

Though the new software will also be available on iOS (NASDAQ:AAPL) and Android (NASDAQ:GOOG) within the year, the service is a clear attempt to boost the attractiveness of the Surface tablet. The service will have the same selection of songs as the recently discontinued Zune Pass, and it revives the firm's presence in music.

It's clear the service will compete with Spotify, Pandora (NYSE:P), Google Music, and iTunes, though it is the only service in the cohort to offer ad-supported on-demand streaming combined with owned-media downloads. It does, however, come with a small-catch: streaming goes from unlimited to being capped at 10 hours in 6 months.

Regardless, the announcement underscores the trend we've been witnessing in the Internet radio and music space: it's incredibly competitive! Though it may be convenient for users to have saved radio stations (Pandora), own their own music (iTunes), or have access to a customized library (Spotify), we believe none of these options truly provides any firm with a sustainable competitive advantage. The barriers to entry are relatively low, especially for companies with huge cash hoards like Microsoft, Google, and Apple. Switching costs are practically non-existent, and we think this market could become highly fragmented, depending on preferences.

Much has been made about the possibility of content costs falling, particularly at Pandora, but with several deep-pocketed companies in the fold, we suspect the market for acquiring content will remain robust. It's certainly a great time to own the content, and we don't expect content costs to fall anytime soon. We wouldn't be surprised to see Facebook (NASDAQ:FB) enter the space via an acquisition of Spotify or its own music service, making the market even more competitive.

Ultimately, we do not think the service will make-or-break the Surface, but we think it could drive some incremental advantages, especially for those consumers interested in specifications and new features. We continue to like shares of the tech giant, and we hold shares in the portfolio of our Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: MSFT is included in the portfolio of our Dividend Growth Newsletter.