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Summary:

Out of all the startups that have tried to reinvent the way we listen to music over the past decade, few have attracted as much attention as free streaming music service Spotify, the latest potential “iTunes killer.” As the European company moves to unleash its sleek […]

logoOut of all the startups that have tried to reinvent the way we listen to music over the past decade, few have attracted as much attention as free streaming music service Spotify, the latest potential “iTunes killer.” As the European company moves to unleash its sleek user interface on the American market, Spotify could prove to be as game-changing as the original Napster, the turn-of-the-millennium file-sharing service that caused music sales to crater as it taught consumers not to pay for songs, or as disappointing as the second-generation, “legal” Napster, a music rental company that failed to win over the mass market before being sold to Best Buy last year.

The success or failure of Spotify largely hinges on its use of the increasingly familiar “freemium” model, in which a basic free service is augmented by a paid one with additional features. In Spotify’s case, its free streaming and sharing service is supported by advertisements, while paying users get better sound quality and no ads. But Spotify’s ace in the hole is that paid users will also have access to streaming songs via its mobile applications, including a recently approved iPhone app. Add in Spotify’s mobile caching function, which will make songs available offline, and the company will essentially fulfill the long-awaited dream of any song, anytime, anyplace, on demand.

The catch? Spotify’s paying customers are still just renting songs, for about $13-$16 per month, depending on the country in which the listener resides. Most discussion of Spotify has centered around a trend toward streaming music rather than owning it, when in fact the more critical question is whether it can persuade a significant percentage of consumers to rent songs rather than just listen for free. (Otherwise, it’d be just another free music site, doomed to face the same struggles as MySpace Music.) I doubt that many free users will convert to paying customers, for a few reasons:

  • By and large, consumers aren’t all that interested in renting music. When each last revealed its numbers, neither of the two leading music rental services, RealNetworks’ Rhapsody and Napster, had more than a million paying subscribers.
  • If people really cared about sound quality, they probably wouldn’t be listening to MP3s.
  • Unlike most successful freemium models –- Flickr, Dropbox, Evernote, et al -– Spotify isn’t a free “lite” service that power users pay to upgrade after maxing it out. Rather, people will be expected to pay for a superior experience of a service that’s already very good. The ad-free upgrade sounds nice enough, but a reasonable price point for that is probably closer to the $3 that it costs for Pandora One.
  • It’s expensive. Is the ace in the hole -– unlimited access to on-demand mobile music –- really worth $10-$15 per month, especially if consumers won’t own their songs if they stop paying?

Spotify may be a very popular free desktop service, but its conversion rate to its premium service will be the make-or-break metric, the one that determines whether it will generate a seismic shift or a minor aftershock. As for the two Napsters, in the end, neither one was a success story. The original company had tens of millions of users but never had a business model and was thwarted by legal problems, while Best Buy acquired the second, publicly traded Napster for $121 million after years of disappointing sales. (They’re still working on the mobile experience, too.) Considering that Spotify’s venture investors reportedly valued the company at $250 million in a recent round, it’s going to take an awful lot of mobile music lovers to produce an exit that will make them happy.

This article also appeared on BusinessWeek.com.

  1. I used to be part of the crowd saying I would always like to own my music. However, when I first began to use Spotify all that changed. The difference is there to see and feel for the users and so far very few of the many millions using the service in Europe have complained about the lack of ownership.

    I have a big CD collection gathering dust. I don’t play those anymore. Ownership is a thing of the past and Spotify is already a game changer.

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  2. Why is Spotify a game changer when the free services from Pandora and Last.fm offer the same giant song selection, apps on iPhone and other mobile devices, and even apps on things like Boxee?

    I don’t get it. Why is Spotify any different?

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    1. Stacey Higginbotham Friday, September 18, 2009

      With Spotify you can choose what song you listen to and create a playlist based of whatever songs you want.

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  3. “If people really cared about sound quality, they probably wouldn’t be listening to MP3s.”

    Just so true. Here is the thing. That when i get a really intense album that i want to listen to all the intricacies of the music. And really “feel” the music. I buy the album. When the album is just same old same old and i dont really care about quality. You will just get the torrent.

    If people are downloading off the net, regardless of price, they dont care about the quality. If they did, they would be buying the CD or LP.

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  4. Not to forget that there is easy to use software and lots of websites which explain how to copy Spotify’s music as MP3 files to your own harddisc. That’s another DRM nightmare.

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  5. [...] Really, I wrote this post because my little post on “How to Get a Free Spotify Invitation” gets hundreds of hits per day.  So it’s a topic that is growing in popularity.  In a post today, GigaOm called Spotify the new Napster. [...]

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  6. Rhapsody has been around for ages, has tons of device support, and is $13 a month for unlimited music. It works on every Tivo, iPhone, several other devices… And yet they still don’t have a million subscribers. How is Spotify any different?

    The model itself is flawed, IMO. I don’t want to rent music. If I like the music, then I want to own it. I’m not paying a monthly fee just to have*my* music available to me.

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    1. It is different because you don’t need to pay anything for the standard service if you don’t mind a fifteen-second ad every so often — much less intrusive than normal radio in the US.

      So in this sense it is like a personal radio. You don’t own the songs, but you can listen to whatever you want. They don’t have everything, but they do have pretty good coverage.

      I like Last.fm a bit better for discoverability — but they’re now charging for _everything_. And spotify is improving this as it signs deals with more labels.

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  7. So now Napster is blamed for teaching “… consumers not to pay for songs?” What a silly comment to make. All Napster did was create a larger and more convenient market for trading/swapping/copying songs that many of us were doing in the first place, albeit on a much smaller scale. Hell, I was doing that with cassettes back in the 80′s with my friends. The only difference is that there is a much bigger variety of music to choose from than we had back then because geography is no longer a factor.

    As others have pointed out, no one really wants to rent music. If I put money down to listen to music I want to own that music. With iTunes and Amazon finally ditching DRM they are coming closest to a working business model. Whether the service is renting songs or streaming them is it really that different than standard radio? The few differences are that radio has many more commercials and a smaller variety of genres, other wise they do the same thing, which is play songs.

    Spotify is getting a lot of attention right now but I don’t think it will last very long.

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  8. >> If people really cared about sound quality, they probably wouldn’t be listening to MP3s.
    Well they are nor really listening to MP3, Spotify uses Ogg Vorbis ;-)

    >>By and large, consumers aren’t all that interested in renting music. When each last revealed its numbers, neither of the two leading music rental services, RealNetworks’ Rhapsody and Napster, had more than a million paying subscribers.

    I do not know if about Napster but Real networks has burned their bridges when it comes to customers, no one in their right mind would install their software.

    When it comes to success it’s not a question of just service and technology, it’s about timing and traction, both of which Spotify has. (not to mention the stake the recording industry has in it.)

    In the last month I’ve put more money into the record industry then I’ve have in the last 10 years by being a paying Spotify subscriber. And I do not care if I just rent the music, it’s a service I can not get any other way legally or not. (it’s a connected world now, and DRM defeats the purpose of owning).

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  9. I use Napster; £15 per month, download and transfer tracks to my MP3 player (Sandisk Sansa View) and to my phone (Windows Mobile), listen to it in the car, through the web interface at work, the kids love it too cos I can put all the hannah montana stuff on their players. I dont see any reason to move to a streaming only / IPod handcuffs model. Personally that is. I appreciate a LOT of people do have IPods and this will look appealing. But my point is it’s still not as flexible IMHO.

    I just avoided Apple and IPod cos of their handcuffs policy and lack of decent support for my own MP3 collection. As an MP3 player, it sucks I’m afraid.(I can feel the flames licking at my heals now!) On the flipside I appreciate it is not just good, brilliant, at being a toy, and the app store is awesome.

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  10. [...] P2P technology has a place in above-board distribution as it partially powers everything from streaming music service Spotify to several video distributors, so Wolfe is onto something. But if the idea is that the old paradigm [...]

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