Spotify Shift Signals the End for Ad-Supported Music

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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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