Spotify and the New Music Platform

It has been ten years since Napster fundamentally changed the way people get their music, and the recording industry continues to suffer in the battle against its newest archenemy, file-sharing. The public now expects to get its music easily, on demand, all-you-can-eat, and all for free. File-sharing is now purported to amount to around 93% of all music consumption in the U.S. Physical sales continue to freefall, and it seems record companies are finally beginning to loosen their grip on the stranglehold they have on recorded music.
Today most companies are re-aligning their sights on new models for distribution utilizing the digital medium. It seems the devaluation of sound recordings has forced the hand of the industry to work alongside all kinds of new music service companies, while working to monetize their artists in new and inventive ways. Most startups have aimed to lure users away from peer-to-peer networks by making free music offerings, but many have failed to turn a profit reasonably enough to cover the high cost of licensing music from labels, songwriters, and performing rights organizations.
Some, such as Rhapsody and Napster, have turned to subscription-based models that offer unlimited access and a number of downloads per month for subscribers. Other startups like imeem and Last.fm have utilized the popularity of social networking tools, as revenues are mainly based on selling advertising. Internet radio sites like Pandora and Slacker have all benefited from ad-based revenues and recommendation technology for user-taste generated content. As Internet radio popularity grows, sites like Pandora have been able to re-negotiate their deals with labels in order to help make their business models more profitable.
The most successful models have been able to offer up enough free features to make themselves a viable competitor in the market, while giving users the opportunity to subscribe to avoid advertisements and receive access to other member oriented benefits. These “freemium” type models face the reality that free continues to be a major value factor in the digital marketplace. Any startup hoping to compete for users today must combine the best of what has worked for others with a unique vision into the future. For this reason, Spotify remains as one of the most talked-about startups today.
Founded by Daniel Ek, a 26-year-old entrepreneur from Sweden with experience in other digital startups, Spotify is Ek’s vision for the future of how music will be accessed. “Basically we were trying to create an alternative to piracy… the only way to beat piracy is with a better product.” In an interview with All Things Digital, Ek adds “we have been focusing on managing peoples music… just being able to play music and share it with their friends.” Launched in Sweden in October 2008, Spotify has become quite popular, having grown to 6,000,000 users (2,000,000 in the U.K,) in under a year’s time. Now with over a million users in Sweden (just over 10% of the population), Spotify accounted for 35% of digital music revenues in July in that country, and continues to double their revenue every two months.
So why is it so popular? What makes it different from other subscription or ad-based revenue music services like Rhapsody, Pandora, or Last.fm? For now Spotify operates as a client for streaming music on a user’s PC and mobile device. On your computer, Spotify’s interface operates very much like iTunes; the difference being you can stream any song without restriction from the enormous on-demand library. An ad will play at the end of a song around three times per hour. Users and critics alike have heaps of praise for Spotify’s lightweight and intuitive interface, a main selling point to users of other (illegal) peer-to-peer downloading programs and torrent clients. As of October 1st, Spotify premium users also have access to their music (3,333 tracks worth) while offline, great news for frequent travelers or those who have spotty Wi-Fi connections at home.
Spotify falls short in making recommendations as well as Pandora or Last.fm, but this is expected to change as the product develops. Most significantly, Ek hopes that Spotify will emerge as a platform for other companies. “What were trying to do with Spotify is build a platform. Ultimately, … the best compliment would be if companies such as Pandora and Last.fm build stuff on top of the Spotify platform.”
From the onset, Spotify has expressed great interest in utilizing the power of today’s smartphones to deliver access to their music library over mobile broadband connections. Indeed, a major selling point of the Premium subscription is access to Spotify’s catalogue on the go. There was some concern that Apple would not approve an app that could potentially compete so directly with iTunes, but in August Apple approved Spotify’s iPhone app without complaint.
The ubiquity of access Spotify provides to its vast music library is not limited to the iPhone: Spotify can be used on phones equipped with Google’s Android mobile operating system, and will soon be available on most Nokia and Samsung phones. This is another major selling point for the platform, as mobile access is imperative for Spotify if it is to have a shot at success in the U.S. market. The quality of streaming in their app is much better than the recently released Rhapsody iPhone app, which struggles in stream quality, loading time, and ease of scrubbing. Additionally, and unlike the current version of Rhapsody’s app, Spotify caches playlists on your phone’s memory as well, so you can listen to your music in places outside coverage zones, such as in the subway or on an airplane.
Ek’s forward-thinking philosophy is also applied in the development of LibSpotify, an Application Programming Interface toolset, or API, enabling third-party software developers to write applications that utilize the Spotify music streaming service. “This is the first step towards becoming more of a platform,” Ek said in an interview for the English newspaper The Guardian, “If somebody wants to build it into media center PCs, or… integrate Spotify into TV screens, they can. …There are lots of areas where we don’t have the resources to do our own development. This takes the workload off our backs, and we don’t know every way that people will want to use the service.” Eventually, you may be listening to music on your TV, home audio receiver, or gaming system using the Spotify platform.
Netflix embarked on a similar venture recently to step up competition against Blockbuster. To avoid the high cost of mailing DVD’s, they developed their own API and paired it with hardware- including DVD players and flat screen TVs. Amazon has followed suit with their Video on Demand service, as it is now accessible through some higher-end models of Panasonic HDTVs.
While there is a lot of excitement over Spotify’s model, many questions still remain about the viability of Ek’s vision. Many novel startups have failed, and subscription models have yet to make a significant dent into the pay-per-download paradigm dominated by iTunes. This was evidenced by Rhapsody’s recent layoffs and the early demise of online startups Spiralfrog and Seeqpod last year. As of yet, the company has yet to turn a profit. Currently valued at around $317 Million and growing, Spotify has been able to raise plenty of capital- including investments made by major labels. However, it remains to be seen if subscriptions and ads will amass enough receipts to cover the high operating costs of licensing deals, which will rise in tandem with Spotify’s popularity.
Since the summer, the company has been in negotiations with the major U.S. labels and rights holders regarding just that. While details of their deals with U.K. labels, publishers, and performing rights organizations are secret, it seems that Spotify is gaining traction. It took two and half years for the deals to be negotiated, but the quality and quantity of content that Spotify has acquired in Europe is significant. It remains to be seen if the US labels will become signatories as well, although their investment in the company is a good sign.
Sheer scale is definitely going to be key, and so far Spotify has had no trouble with that. They have been holding their tongues regarding just how many of their users are becoming premium members, but they expect a majority will only use the free version. It is estimated that in Europe, around 9% of Spotify users have signed up for the Premium version. The cost of a subscription is around $16 per month – about the cost of buying one CD. For those conditioned to pay for music, this may not seem like much. But the younger generation is used to accessing a near endless amount of music on demand without paying for it.
The company states that they expect 60% of their revenue to come from subscriptions, while only 40% to come from advertising. The emphasis on subscriptions, however, could possibly hurt their image with advertisers, who don’t have access to the eyes and ears of premium users. Founder Daniel Ek remains positive about the model, noting that “What’s interesting about the platform is that we have both audio and display advertisements … [Those advertisers that] have been creative about the audio format have been getting really good click through rates…[some] between three and five percent.”
Aimed for a US launch date in the first quarter of 2010 at the latest, the response of the American public will be a great litmus test for Spotify and the viability of its freemium-access model. There, Spotify could potentially face a bid from the majors. Ek is adamant, as he tells Kara Swisher of All Things Digital, in maintaining that he does not want to sell and forsake the independence of the company. Part of this has to do with Spotify’s own image of trend-setting and iconoclastic branding.
Spotify, at its core, is a company based on a vision for how music should be accessed. It was started as a reaction to what has become a wildfire of copyright infringement on a global scale. It is hard to deny the ubiquitous nature of free music today, and the challenge the music industry has faced trying to figure out the best way to compete. Ek understands that ultimately, people already have access to music that they can get without any cost other than their Internet connection. In order to convince the public to use a service with ads, you have to make it easier and more enjoyable for them to use your product than to download music illegally. Indeed, 80% of Spotify users report that they have stopped file-sharing. By embracing an open-source ideology while simultaneously offering numerous possibilities for monetizing access, Spotify may be positioned as a forerunner in the quest to re-work the way the world quenches its thirst for music.
If Daniel Ek is not the first person to come up with these ideas, he may well be the first to make them work in the marketplace. “Everyone told me that we would go and bang our head against the wall…” he concedes; “the problem with me is that I am probably naïve enough to believe that I can make a difference.”

By Michael Benson

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