Spotify’s Plan for 50 Million Homes

Emiliano Ponzi

Europe’s hottest online music service, with its ‘freemium’ appeal, is about to storm the U.S.

For music connoisseurs in the U.S., the Sweden-based online music service Spotify has become the equivalent of French raw milk cheese or Dutch marijuana: one of those delectable European products you just can’t get in America.

Launched in 2008 and now available in seven European countries, Spotify has long been a source of envy for those on the other side of the pond. Euro users boast about the service, which lets them listen to and share any song by any artist on-demand and do so instantly, tapping Spotify’s online cloud of 13 million tracks. Tech geeks wax lyrical about Spotify’s slick, glitch-free interface, which they say is faster and more responsive than iTunes, Pandora or the jungle of illegal file-sharing sites out there (Spotify, unlike many others, has always paid for music rights). And unlike other on-demand music offerings (Rhapsody, Mog, Slacker), Spotify lets you sign up and listen for free. It makes its money through a combination of ads and monthly subscription services that let users unlock such premium features as allowing storage of songs on their mobile phones and iPads. Wired called Spotify “perhaps the biggest, coolest, best piece of software you’re not allowed to use.”

But that’s about to change: Spotify on July 6 announced its impending domestic launch. Spotify’s CEO, the soft-spoken Daniel Ek, has signed U.S. licensing deals with three of the big four labels: Universal, Sony and EMI. The only holdout was Warner Music Group. However, the announcement suggests Ek has Warner on board, removing Spotify’s last barrier to U.S. entry.

Cracking the U.S. has taken so long because unlike Europe, where every country has a single national association that manages the rights to stream or broadcast music, Spotify has had to negotiate in the States with a slew of record labels and copyright holders to get the critical mass of titles it needs.

In Europe, Spotify in three years has gone from start-up to 10 million users, several times more than its nearest rival. More than 1 million of those are subscribers paying Ek and his team $5 to $10 a week for unlimited access to Spotify’s catalog. That 10-percent conversion rate makes Spotify the market leader worldwide. If it can repeat the feat in the U.S., Spotify could challenge iTunes’ dominance in the online music market. (Spotify reportedly has told advertisers that it hopes to have 50 million U.S. users in a year.)

The service has some prominent promoters. Sean Parker -- the founder of Napster, a former Facebook president and the man immortalized by Justin Timberlake in The Social Network -- has a seat on its board and has invested about $15 million.

During a recent conference in Paris, Parker said Spotify could help pull the global music industry out of a decade-plus slide that has seen sales plunge from $27.2 billion in 1998 to $15.9 billion last year. Others are infatuated as well: Spotify just finished a $100 million funding round that values it at $1 billion.

But the U.S. is not Europe. When Spotify launched, U.S. music streaming services such as Pandora, Rhapsody and Mog were blocked in Europe, and Apple, Amazon and Google had yet to launch their digital music services. Three years later, the situation is very different.

“As cool as the technology is, they are not walking into a market that is underpenetrated in terms of mobile music,” says ABI Research analyst Neil Strother. “Americans already have a lot of digital and mobile music options. Spotify will face challenges in terms of service and marketing differentiation.”

Aside from its much-hyped technology, what really sets Spotify apart is its “freemium” service -- no other streaming site lets you listen to so much on-demand music without asking first for your credit card. As Ek says, Spotify is not only legal, it’s “easier than piracy.”

But Strother believes that for Spotify to break big in America, it needs a headline-making deal, maybe through a carriage agreement with Facebook -- already rumored to be in the works -- or an exclusive deal with the likes of Adele or Lady Gaga.

“There is a lot of marketing noise to get through,” he says. “They need to come to market with something splashy. I am not saying that they will not find some success, but it’s not necessarily a slam dunk.”

Georg Szalai contributed to this report.

NAME THAT TUNE: How Online Music Measures Up

Pandora

  • Founded 2000
  • Users 94 million (as of April)
  • Paying subscribers Unknown
  • Tracks 800,000
  • Play-on-demand No
  • Deals with all major labels Yes
  • Business model Ad-backed free service 40 hours a month, 99 cents a month for unlimited streams, $36 a year for ad-free

Rhapsody

  • Founded 2001
  • Users Unknown
  • Paying subscribers 800,000
  • Tracks 11 million
  • Play-on-demand Yes
  • Deals with all major labels Yes
  • Business model After a 14-day free trial, $10 a month for use on one mobile device, $15 for three devices

Last.fm

  • Founded 2002
  • Users 40 million (claimed)
  • Paying subscribers Unknown
  • Tracks Unknown
  • Play-on-demand No
  • Deals with all major labels Yes
  • Business model Ad-supported free service, $3 a month for ad-free

Mog

  • Founded 2005
  • Users Unknown
  • Paying subscribers Unknown
  • Tracks 10 million
  • Play-on-demand Yes
  • Deals with all major labels Yes
  • Business model $5 a month for online service, $10 a month for mobile

Slacker

  • Founded 2007
  • Users Unknown
  • Paying subscribers Unknown
  • Tracks 2.4 million
  • Play-on-demand Premium only
  • Deals with all major labels Yes
  • Business model Ad-backed free service, $4 a month for ad-free, $10 a month for on-demand
 
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