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What's Behind Tesla's Music Streaming Ambitions?

Tesla (NASDAQ: TSLA) confounded analysts and investors by announcing ongoing negotiations with record labels to secure licensing deals.

In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu explain why Tesla wants to get into the digital music-streaming space, where this fits into the company's strategy for the long term, and what investors can make of the news.

A full transcript follows the video.

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This video was recorded on June 30, 2017.

Dylan Lewis: Tesla has music-streaming ambitions. Who knew?

Evan Niu: There are reports that Tesla is negotiating with the record labels to get some licensing deals going, which is really weird. Anyone that watched the annual meeting, which was earlier this month, might not have been as surprised because Elon Musk dropped some hints that they would have some announcements later this year for music streaming and matching algorithms, and everyone was like, "What are you talking about?" [laughs] Everyone was scratching their head at the meeting. And, of course, this report comes out a week or two later. It's a very weird -- like, why?

Lewis: Yeah. You think, with so many other things going on, with them bringing SolarCity into the fold, everything that he's trying to do in terms of upping production to meet estimates on what they're going to be delivering for cars, there are a lot of balls in the air over at Tesla right now. It's amazing to me that they want to take on something like media as well. But I don't really feel like betting against Elon Musk.

Niu: Yeah. It seems like it might be a distraction, but at the same time, the whole thing is really confounding, because if the whole point is to come up with better matching algorithms, it's really hard to imagine Tesla doing that better than Apple or Spotify, specifically when it comes to just as far as the matching and the curation. Apple and Spotify have entire teams dedicated to just that, and Tesla does not. Should they really be focusing on that right now? The flip side of this, Morgan Stanley has an analyst, Adam Jonas, who's generally a longtime Tesla bull, he kind of made the case for why this makes sense from a content perspective. He argued that Tesla should be owning the content experience that's coming through their vehicles, which makes some sense, specifically because Tesla is a fan of vertical integration. I think there's a difference, though, because right now, when you say content in a car, primarily that's just music streaming right now. Today, it's just music. Because regulations prevent video playback on a car for entertainment systems, so there's no video in the mix right now.

But if you look longer term, and we start talking about this whole autonomous driving thing, and as regulations loosen and we approach autonomous driving from a technical perspective, then you can see more of a case where the types of content that you'll have in your car will expand. When you're not driving, you're going to want to watch something, once regulations say it's OK, if you're not actually driving at all. So, over time, it does seem like there's going to be more types of content beyond just music, maybe video. And it makes some sense that Tesla would want to own that or control that, or basically be the one that's providing that service. At the same time, it's not like they're going to become Netflix, I hope. [laughs] You could see a case for why it would make sense that they'd want to own more of the content coming through the car, particularly as that content expands in the years ahead. But the timing is hard to reconcile. That's a pretty longer-term goal, because autonomous driving is probably still a few years out, both in terms of technology as well as regulation. So, they have some time to figure this out, so it's kind of like, why are they doing this now when they have so much other stuff to focus on?

Lewis: I guess the thought with Tesla has always been, "Let's get things as ready for the future as possible." They're shipping vehicles that are technically kind of autonomous-ready, it's just that they're not actually functionally autonomous at the moment, and they require drivers. And maybe the media ambitions here are the same, where it's like, we're going to position ourselves for the next 10-20 years now, because we can see this is going to be a major thing. I think, as an investor, you just have to say, this is something that Elon Musk is interested in, and just hope that it doesn't take too much time from him, because they still have a lot of other things to live up to.

Niu: Right, I think that's the crux of it. It's one thing if they're just exploring this, and maybe laying down the foundations for something that's to come later. So long as that's all they're doing, and they're not really putting a ton of energy into this, and it's not distracting them from the more important things, I think it's fine. Hopefully it's just a small little thing that they're like, "Let's go explore this a little bit." As long as they're not letting it distract them, then I think it's probably OK.

Dylan Lewis owns shares of Tesla. Evan Niu, CFA owns shares of NFLX and Tesla. The Motley Fool owns shares of and recommends NFLX and Tesla. The Motley Fool has a disclosure policy.