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Summary:

Europe’s hottest on-demand music service, Spotify, is narrowing its free offering as it tries to boost subscription numbers and prepare for an American launch. Will it finally end the ongoing delusion that advertising can ever make enough to support streaming music services?

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Spotify, the popular, European, on-demand, music service, has gotten used to things going its way since it launched amid a blaze of publicity back in 2008: plaudits, awards and more than a million paying users. Thursday, however, it took a bit of a beating after announcing plans to drastically limit the scope of its ad-supported free service.

Originally, users could listen to an unlimited stream of music for free, as long as they didn’t mind it being supported by ads. A year ago, it rolled back a little, limiting the amount of free listening to 20 hours each month. Thursday, the company announced the free-to-use model is now cut further to 10 hours each month, and non-subscribers can only listen to a single track five times ever.

So why make the changes?

What’s clear is the current free service is costing too much and not generating enough income. Spotify’s latest public accounts (from 2009) suggest it’s still losing significant amounts of money, although analysts suggest 2010 revenue is likely to ramp up to €59 million ($85 million USD). Spotify needs more.

That’s why the company is pitching its subscription services as the natural evolution for anyone who feels the changes will hit them. It currently has two paid-for tiers of service: a no-restrictions offering that costs £4.99 ($8.15 USD) each month, and a premium subscription, which includes mobile streaming and offline caching, for £9.99 each month.

The implication from co-founder Daniel Ek is that if you’re affected by these changes, you’re probably a heavy Spotify user who should think about subscribing instead. And yes, if the free service is annoying to use, then he’s right: Subscription looks like a better deal. But will it work? The trade-off might be worthwhile for the company, but it’s going to tick off a lot of people off.

Ultimately, we’ve all been stuck in some collaborative hallucination believing ad-supported music can work. It’s yet another indictment of the ad-supported model — the one Last.fm and Pandora have found problematic. Many have tried, yet nobody has really managed to make it work, because advertising isn’t enough to pay licensing fees across millions and millions of on-demand tracks.

Younger services have realized this problem and avoided it, sacrificing the publicity of a free service for revenue. MOG and Rdio are essentially subscription-only services — and even so, it’s not yet clear how sustainable they are.

The other question, of course, is what this means for Spotify’s long-awaited American launch. A more rational business is, perhaps, more likely to get the deals it needs to hit the U.S. market. Perhaps it’s time, finally, to take ad-supported on-demand music over the Internet land lay it to rest.

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  1. First of all, thank you so much for not using the word “pivot.”

    The main point, though, is that this seems to remove much of Spotify’s differentiation from the competition. Maybe it brings a US launch closer, but will the thing that launches be the Spotify that people have been waiting for?

    1. Right on with the ‘pivot’ comment…

      Spotify’s speed and display of music ratings may be enough to make it stand up well against Rhapsody, but Rhapsody isn’t exactly killing it out there.

      What we need is a combination of Pandora (grazing) and Spotify (hunting), along with the ability to send music to non-members for them to listen to once (great recruiting feature).

  2. What about Grooveshark? It does pretty much the same thing and it does it with out the ads within the music track. Yes it has banner adverts but what the hell, if it doesn’t disturb my music experience, put whatever you want. It does have a subscription fee as well, with major benefits but the free service covers all the basic needs.

    1. I like some of their ads. The spoof April Fools ad was great.

  3. Important to point out is that Spotify is not changing anything for the user’s first 6 months of use. Still free, still 20h per month fair use limit.

    The new restrictions kick in after 6 months, with 10h fair use limit and 5 track play limit.

    Pretty fair and still an awesome value for the free users.

    1. It’s neither fair nor awesome. If I have to endure ads I want it free. Otherwise I quit. Did it for cable TV before. The problem is people like you not knowing where the red line should be and what was once unacceptable became acceptable. Grooveshark will get by ad-listening business from now on.

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