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Summary:

Setting up a streaming music service in the U.S. isn’t easy, thanks to the company holding the music industry’s purse strings. That company is Apple, and according to Spotify’s head of business development Faisal Galaria, it’s a force that may be impossible to reckon with.

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Setting up a streaming music service in the U.S. isn’t an easy task, and to find out why, you need only look as far as the company holding the music industry’s purse strings. That company is Apple, and according to Spotify‘s head of business development Faisal Galaria, it’s a force that may be impossible to reckon with.

In an interview with StrategyEye, Galaria suggested that one of the main reasons behind the long delay of Spotify’s U.S. launch (originally rumored for 2009, then set for 2010 by the company itself) is that the labels depend too heavily on revenue from iTunes to risk angering Apple:

If you’re the digital team [at a label] and 80% of your revenue was coming from one place, how much are you going to p*ss them off until someone else can guarantee all that revenue from a new source?

Put yourself into their shoes for a moment – you’re a nice, fat big executive at label X, Y, Z. You’re getting half a million dollars a year as long as you hit your bonus. Your bonus means that 80% of your revenues comes from iTunes. Are you going to tell iTunes where to go? Because your half a million dollar bonus has now gone.

Galaria also suggests that the reason Apple is obstructing the arrival of Spotify in the U.S. (where the music market is larger than all of Europe’s combined) is that it’s working on its own cloud music service, and doesn’t want any existing competition in the space when it comes to market.

That Apple carries a lot of weight with record labels is hardly a secret, nor is it news. Ever since the introduction of the iPod and the iTunes music store, Apple’s influence on the music industry has been growing at a pace that rivals like Amazon .mp3 couldn’t possibly match. In many ways, the Nov. 10 announcement that finally brought the The Beatles catalog to the iTunes store is a good symbolic representation of its current dominance.

Though Apple’s influence shouldn’t come as a surprise, Galaria’s comments are important for two reasons. First, they remind us that Apple does nothing by accident, and probably plans much far further out than most other companies can anticipate. Music industry clout  gives Apple the freedom to proceed at its own pace (which depends on being able to offer a consistent, quality experience before going to market) with cloud music delivery.

Two, it reinforces Michael Wolf’s assertion that leading the way with a cloud-based music service is basically a card that Apple alone holds right now. Just like with NFC and digital transactions, Apple is the brand most users trust when it comes to handling their music purchases. If labels move to the cloud independent of Apple, there’s no guarantee Apple’s users will follow, and 80 percent of revenue isn’t a figure any major content provider can risk losing.

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  1. Spotify.. A small music service in a few European countries with a world-class PR machine…

    “[Apple] doesn’t want any existing competition in the space when it comes to market.”

    So, here in the U.S., there are — and have been — a number of cloud-based competitors, some for years. They are called Napster, Rhapsody, rdio, MOG, Grooveshark, et al. The only difference between them and Spotify is that Spotify offers a tier for free from a huge catalog. Spotify states over and over again that their business plan, however, centers on paid customers.

    Paid customers who get a service that is virtually identical to the ones I have listed — in fact, it’s far inferior in some dimensions from a user experience standpoint, while being superior in some.

    As Apple has no intention of offering an ad-supported, large-catalog streaming service. In fact, some evidence points to Apple thinking you will pay them to stream music you own and not even doing a full on large-catalog subscription offering (which will fail to attract any meaningful number of customers if they go that route). The notion that somehow Apple is actively thwarting Spotify is silly as the two won’t compete head on and Apple already has numerous cloud music competitors in the U.S.

    Let’s just agree that the record companies are rightly skeptical whether an ad-based, large-catalog service will make them any money. Let’s further agree that some of them might feel it would cut into revenue from iTunes. And let’s check the other conspiracy theories at the door. And stop pretending Spotify is more important to Apple than Napster, Rhapsody. MOG, rdio, and perhaps even Pandora.

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    1. Yet, somehow, Spotify is making more money for labels in Sweden than any other retailer: http://www.wired.co.uk/news/archive/2010-10/29/spotify-swedish-revenue

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      1. So Sweden — over several years — has proved that some small number of artists popular there generate enough payouts from Spotify to justify being there. That is certainly something, although exactly what and how it extrapolates is unclear.

        Sweden has fewer people than the New York metro area, for example. As to heterogeneity of tastes, I suspect it may be less prevalent in Sweden than in, say, the U.S.

        I did read the linked article, but I’m not sure what it really tells us about the prospects for the business going forward. Labels — correctly — assume that ad-sponsored services are not a substitute for paying customers. Spotify has a very low rate of paying customers.

        They have world-class PR. That is for certain. My guess is Apple’s strategic plans still center around the aforementioned list and Google. The limits on free, ad-supported Spotify U.S. are likely be sufficiently tiny as to make it unimportant. And more importantly, mobile requires paying.

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  2. Pandora Rocks!!! …on my iphone. Let’s give a cheer for unlimited data plans. Woot :)

    I think Spotify may be overstating their importance. Get a grip guys…check it out, its called Pandora. Spotify open your eyes, record corporations are like baseball and the cable industry, they talk and settle these things in dark smoky rooms.

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    1. Marshall Kirkpatrick Saturday, January 29, 2011

      Sorry, Pandora is cool but Spotify, Rdio, MOG et al are all much better but for discovery.

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  3. dreamsburnred Sunday, January 30, 2011

    Come to Canada please…we need it bad.

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